Fitch Ratings has downgraded Pakistan’s long-term foreign-currency issuer default rating (IDR) to ‘CCC-’, from ‘CCC+’ and assigned no outlook because it “typically does not assign outlooks to ratings of ‘CCC+’ or below”, a statement from the agency said Tuesday.
“Default or debt restructuring is an increasingly real possibility, in our view,” it said.
The downgrade reflects further sharp deterioration in external liquidity and funding conditions and the decline of foreign exchange reserves to critically low levels.
The statement stated that dwindling reserves are a result of significant, albeit declining, current account deficits (CADs), service of external debt, and previous FX intervention by the central bank, particularly in 4Q22, when an apparent informal exchange-rate cap was in place.
“We expect reserves to remain at low levels, though we do forecast a modest recovery during the remainder of FY23, due to anticipated inflows and the recent removal of the exchange rate cap.”
“While we assume a successful conclusion of the 9th review of Pakistan’s International Monetary Fund (IMF) program, the downgrade also reflects large risks to continued program performance and funding, including in the run-up to this year’s elections. Default or debt restructuring is an increasingly real possibility, in our view.”
Fitch expected reserves to remain at low levels, though the firm forecasted a modest recovery during the remainder of FY23, due to anticipated inflows and the recent removal of the exchange rate cap.
The agency added that external public-debt maturities in the remainder of the fiscal year ending June 2023 (FY23) amount to over $7 billion and would remain high in FY24.
Pakistan’s CAD was $3.7 billion in 2H22, down from $9 billion in 2H21. As such, Fitch forecasts a full-year deficit of $4.7 billion (1.5% of GDP) in FY23 after $17 billion (4.6% of GDP) in FY22.
The narrowing of the CAD has been driven by restrictions on imports and FX availability, as well as by fiscal tightening, higher interest rates and measures to limit energy consumption.
“As such, we forecast a full-year deficit of $4.7 billion (1.5% of GDP) in FY23 after $17 billion (4.6% of GDP) in FY22. The narrowing of the CAD has been driven by restrictions on imports and forex availability, as well as by fiscal tightening, higher interest rates and measures to limit energy consumption,” the firm added.
Reported backlogs of unpaid imports in Pakistan’s ports indicate that the CAD could increase once more funding becomes available, Fitch stated.
