Moody’s places Pakistan’s B3 rating under review for downgrade

NEW YORK: Moody’s has placed Pakistan’s local and foreign currency long-term issuer and B3 rating under review for downgrade, the global ratings agency has announced.

Moody’s said the decision to place the ratings under review for downgrade reflects the expectation that the government will request for bilateral debt relief under the recently announced G20 initiative.

The suspension of debt service obligations to official creditors would unlikely have rating implications and would increase the fiscal resources available for essential health and social spending due to the coronavirus outbreak. The G20 has called on private sector creditors to participate in the initiative.

The review will allow the rating agency to assess whether Pakistan’s participation in the initiative would likely lead default on private sector debt and whether any losses are expected to arise from that participation would be consistent with a lower rating.

Moody’s said coronavirus crisis lead to a sharp slowdown in economic activity, lower tax revenue as economic activity slows, and higher government financing needs

The economic reforms that pointed to an improvement in credit fundamentals before the outbreak and financing from development partners would increase pressure on the sovereign liquidity and external positions.

Moody’s has also placed the B3 foreign currency senior unsecured ratings for ‘The Third Pakistan International Sukuk Co Ltd’ under review for downgrade. Pakistan’s Ba3 local currency bond and deposit ceilings remain unchanged.

The B2 foreign currency bond ceiling and the Caa1 foreign currency deposit ceiling are also unchanged. The short-term foreign currency bond and deposit ceilings remain unchanged at ‘Not Prime’. These ceilings act as a cap on the ratings that can be assigned to the obligations of other entities domiciled in the country.

Moody’s will assess that the main impact of the coronavirus shock is on Pakistan’s economic growth, which raises fiscal challenges and delays the government’s fiscal consolidation and debt reduction efforts. Moody’s expects Pakistan’s economy to contract by around 1% in fiscal 2020 (ending June 2020), and to grow by 2-3% in fiscal 2021 which is below potential.

The economic slowdown will weigh on government revenue and modestly raise spending, in turn pushing the fiscal deficit wider to close to 10% of GDP in fiscal 2020. As a result, Moody’s projects the government’s debt burden to reach around 85-90% of GDP in fiscal 2020.

The rating would likely be confirmed at its current level if Moody’s concludes that participation in bilateral official sector debt service relief would unlikely entail default on private sector debt, or the losses experienced would likely be minimal.