Pakistan’s recent policy measures to curtail rising external risks: Fitch

Fitch Ratings said on Wednesday that it believes Pakistan’s recent policy adjustments measures would aid in curtailing rising external risks.

Fitch Ratings Inc, an American credit rating agency and one of the 'Big Three' along with Moody's and Standard & Poor's, added that ongoing reforms, if sustained, could create positive momentum for the sovereign’s ‘B-’ rating, which it affirmed in May 2021 with a 'Stable Outlook'.

“Fitch Ratings believes Pakistan’s recent policy adjustments and demonstrated access to external financing, as well as its commitment to a market-determined exchange rate, offset rising external risks from a widening current-account deficit,” the agency said in a report titled, 'Reforms and Financial Support Ease Pakistan Sovereign Risks' published on Wednesday.

The report comes just days after the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) decided to raise the policy rate by 150 basis points to 8.75%. The MPC was of the view that risks related to inflation and the balance of payments have increased while the outlook for growth has continued to improve.

We think external liquidity pressures should be manageable in the near term, despite the wider current-account deficit, given Pakistan’s adequate foreign-exchange reserves and success in accessing financing: Fitch

Monetary policy: SBP raises key interest rate by 150 basis points, takes it to 8.75%

Meanwhile, Fitch said that the ongoing reforms, if sustained, could create positive momentum for the sovereign’s ‘B-’ rating, "which we affirmed in May 2021 with a Stable Outlook".

Fitch forecasts that Pakistan’s current-account deficit in the ongoing fiscal year is set to be wider than their previous forecast of 2.2% of GDP, owing to increases in global energy prices and a strong domestic recovery which “have put additional strains on Pakistan’s external position”.

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“We think external liquidity pressures should be manageable in the near term, despite the wider current-account deficit, given Pakistan’s adequate foreign-exchange reserves and success in accessing financing,” said Fitch.

Fitch expects Pakistani rupee to weaken further in 2022

Speaking on the recently concluded staff-level agreement reached between the International Monetary Fund (IMF) and the government authorities, Fitch said that it expects the IMF to release a further $1 billion in funding, provided certain prior actions are met.

“We believe these include amending the SBP Act to formalise the central bank’s institutional independence and removing some tax exemptions. The authorities’ sustained reform efforts and commitment to the IMF programme should support access to external financing, even with global financing conditions potentially becoming more challenging for emerging markets in 2022 as global monetary policy settings grow less accommodative.”

The agency was of the view that if the government continues its commitment to a market-driven exchange rate, “we believe this would be a useful shock absorber to help contain external risks in the longer term”.

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Fitch said that an exchange rate that supports the price competitiveness of Pakistan’s exports could over time help to reduce the country’s reliance on debt financing to balance its external accounts.

“In addition, fiscal consolidation under the Extended Fund Facility (EFF) could help reduce external imbalances by dampening imports, while also reducing the drag of weak public finances on Pakistan’s rating,” it said.

Political pressures could test the government’s commitment to reform, particularly if inflation accelerates from its already high levels: Fitch

“At our rating review in May we noted that continued implementation of policies sufficient to facilitate a rebuilding of foreign-exchange reserves and easing external financing risks could lead to positive rating action.

“We also argued that positive rating momentum could emerge from improvements in the business environment or fiscal consolidation, if sustained over time. Continued adherence to the EFF reform agenda would increase the likelihood of achieving these outcomes, in our view.”

However, political pressures could test the government’s commitment to reform, particularly if inflation accelerates from its already high levels.

In an earlier report, Fitch Ratings revised down its forecasts for the Pakistani rupee for both this year and next due to a variety of factors including an increased flow of US dollars into neighbouring Afghanistan.

Fitch's forecast for the rupee's average rate this year was 164 to the US dollar compared with 158 previously. For 2022, Fitch now expects an average rate of 180 versus a previous forecast of 165.

"Our expectation for the currency to weaken further is based on Pakistan's worsening terms of trade, tighter US monetary policy, alongside the flow of US dollars out of Pakistan and into Afghanistan," it said earlier.