Fitch affirms Pakistan’s ratings with stable outlook

NEW YORK: Fitch Ratings affirmed Pakistan’s long-term foreign currency issuer default rating (IDR) at ‘B-’ with a stable outlook, stating the government’s economic policy actions helped resist the shocks of coronavirus pandemic.

According to a report by the New York-based international rating agency, the coronavirus pandemic has exacerbated the challenges of large fiscal deficits and a high government debt to GDP ratio by depressing economic growth and pressuring the public finances.

“Pakistan’s ‘B-‘ rating reflects weak public finances, including large fiscal deficits and a high government debt/GDP ratio, a challenging external position characterised by large external debt repayments against low foreign-exchange reserves and low governance indicator scores,” it said.

The statement said Pakistan was facing a challenging external position characterised by large external debt repayments against low foreign-exchange reserves and low governance indicator scores. However, the external finances appear resilient to the shock due to policy actions and continuing multilateral and bilateral financial support.

Policy actions by the authorities over the past couple of years eased external vulnerabilities prior to the coronavirus shock. These included tighter monetary policy settings and the move to a more market-determined exchange rate regime, which contributed to a sharp narrowing of the current account deficit and a modest rebuilding of foreign exchange reserves.

Greater exchange rate flexibility has continued during the pandemic and has been an important shock absorber. Liquid gross foreign-exchange reserves of the State Bank of Pakistan (SBP) rose to about $12.5 billion by end-July from $7.7bn a year prior.

The central bank’s net forward position has increased somewhat in the past months and net reserves remain negative, even though they have narrowed. Fitch forecasts a further rise in liquid gross reserves to about $16bn by end of the this fiscal year.

The country’s current account deficit narrowed to 1.1pc of GDP in FY20, from a peak of 6.1pc in FY18, due mainly to import compression and lower oil prices.

Fitch forecasts a slight widening of the current account deficit to 1.7pc in FY21 due to a modest recovery in imports and declining remittances.

Remittances rose unexpectedly by 7.3pc in 4QFY20, but this is viewed as temporary and expect a decline of about 10pc in FY21 due to the impact of the global economic shock on Pakistan’s overseas workers.

External financing requirements have declined, in line with the narrowing of the current account deficit. However, the government’s external debt repayments remain high at about $10.3bn (about 80pc of current gross liquid reserves) in FY21 and $8.9bn in FY22.

The $3bn in deposits at the central bank from Saudi Arabia were slated to be rolled over through 2022, but the Saudi authorities requested repayment on $1bn of the deposits in July. The Fitch forecast the fiscal deficit to remain roughly stable at 8.2pc in FY21, due to the lingering impacts of the coronavirus shock.

Under the recently passed FY21 budget, the government targets a deficit of 7pc, but, in Fitch’s view, this target relies on optimistic revenue growth assumptions from ongoing administrative initiatives, as the budget does not contain new revenue raising measures.

Fitch forecasts that Pakistan’s debt to GDP ratio will rise to about 90pc by end of FY21, from 87.2pc in FY20, well above the ‘B’ median of 50.8pc, increasing debt sustainability concerns.

The deterioration in the debt to GDP ratio is much more significant than expectation of an 80pc level by FY20 at the last review in January, due to the corona virus shock, as well as further currency depreciation.

The Fitch also forecast that GDP growth would rebound to 1.2pc in FY21, following a contraction of 0.4pc in FY20 resulting from the pandemic and the authorities’ macro adjustment policies.