ISLAMABAD: Amid warning of increase in social risks on account of meeting the conditionality of new multilateral financing, Moody’s Investors Services (Moody’s) said that interest costs in Pakistan will account for close to 40 percent of total spending in 2025, up from around a quarter in 2021.
Moody’s in a report “2025 Outlook – Stable as economic risks recede, geopolitical and trade risks persist”, stated that Pakistan recently agreed a new $7 billion International Monetary Fund (IMF) programme to alleviate liquidity pressures.
However, financing from concessional lenders often cannot fully replace sovereigns’ maturing debt. Meeting the conditionality of new multilateral financing can also prove difficult and increase social risks.
Moody’s upgrades Pakistan’s ratings to Caa2, outlook now positive
The rating agency stated that government debt affordability in Pakistan will remain weaker than before the pandemic. Pakistan in Asia-Pacific (APAC) is most vulnerable to food security crises. Government debt affordability in emerging and frontier markets will remain weaker than before the pandemic, particularly in Pakistan (Caa2 positive), Nigeria (Caa1 positive) and Egypt.
A number of sovereigns will face eurobond redemptions in excess of 10 percent of their usable international reserves in 2025, including Bahrain (B2 stable) and Tunisia. Local currency financing needs will also be sizeable for many sovereigns, with gross domestic financing needs of more than 10 percent of GDP in Pakistan and Zambia (Caa2 stable), even after default. Local and foreign currency liquidity risks will therefore remain a key driver of defaults, the rating agency added.
In advanced economies, median debt affordability in 2025 will remain stronger than before the pandemic, although the gains will be eroded. One exception is Greece where improving debt affordability will continue on the back of deleveraging. By contrast, in the US and France, debt affordability will deteriorate significantly, it added.
Moody’s stated that geopolitical tensions are also driving up global military spending. Years of underinvestment and the growing threat from Russia have prompted more European governments to raise defence spending and meet the NATO target of a minimum of two per cent of GDP. Japan’s (A1 stable) Defense Capability Buildup Program will continue to consume an increasingly significant part of its budget in 2025, while India’s defense spending will also grow rapidly amid tensions with China and Pakistan.
While we assume that global food prices will remain much lower than in recent years, low-rated frontier markets like Mozambique (Caa2 stable) and Rwanda (B2 stable) in SSA, Nicaragua (B2 stable) and Honduras (B1 stable) in Latin America and Bangladesh and Pakistan in APAC are most vulnerable to food security crises.
Copyright Business Recorder, 2024
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