S&P downgrades outlook on Pakistan's long-term ratings to negative

Following the announcements of Moody’s Investors Service and Fitch Ratings, S&P Global Ratings on Thursday revised the outlook on Pakistan's long-term ratings to negative from stable. It also affirmed its 'B-' long-term and 'B' short-term sovereign credit ratings on Pakistan, as well as 'B-' long-term issue rating on the country's senior unsecured notes and Sukuk trust certificates.

“The negative outlook reflects growing risks to Pakistan's external liquidity position over the next 12 months amid an increasingly difficult economic landscape,” said the S&P in a statement.

It added that it revised the outlook to negative to reflect Pakistan's weakening external metrics against a backdrop of higher commodity prices, tighter global financial conditions, and a weakening rupee.

“The Pakistan government has considerable external indebtedness and liquidity needs, and an elevated general government fiscal deficit and debt stock.

Outlook could be revised to stable if Pakistan's external position stabilises and improves from current levels. Evidence of improvement could include a sustained rise in usable foreign exchange reserves: S&P

“Although the impact of these more difficult macroeconomic conditions has been partially mitigated by various reform initiatives undertaken by the government over the past few years, the risk of continued deterioration in key metrics, including external liquidity, is rising,” it said.

The agency said that it could lower its ratings if Pakistan's external indicators continue to deteriorate to the extent that the government's commitments appear to be unsustainable in the long term.

Conversely, it said, the outlook could be revised to stable if Pakistan's external position stabilises and improves from current levels. "Evidence of improvement could include a sustained rise in usable foreign exchange reserves."

The development comes after Fitch Ratings downgraded Pakistan’s outlook from stable to negative in view of the significant deterioration in the country's external liquidity position and financing conditions since early 2022. Moody's downgraded Pakistan’s outlook to negative from stable in June.

Fitch said it saw considerable risks to the implementation of the IMF programme and to continued access of Pakistan to financing after the programme's expiry in June 2023 in a tough economic and political climate.

Meanwhile, S&P highlighted that while Pakistan's domestic demand continues to recover, it is now facing a new challenge in the form of rising prices, particularly for staple goods.

“Prevailing price dynamics, including costlier edible oils, fuel, electricity, and grains, are likely to hurt the pace of private consumption growth in the current fiscal year ending June 2023,” it said.

On the International Monetary Fund (IMF) programme, S&P said that the staff-level agreement reflects the government's increasing commitments made over recent weeks to fiscal consolidation in its fiscal 2023 budget.

The agency said that the incumbent government adopted a variety of measures in order to stabilise its fiscal position and to more closely align with IMF programme objectives.

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“However, the current inflationary environment complicates the implementation of such policies. Achieving a primary fiscal balance surplus, and boosting its stock of foreign exchange reserves, will also be more difficult for the government to achieve against the current external backdrop,” it said.

S&P noted that with parliamentary elections due by August 2023, political uncertainty will remain elevated over the coming quarters.

On geopolitical developments, the agency said that although Pakistan’s security situation has gradually improved over recent years, ongoing vulnerabilities weaken the government's effectiveness and weigh on the business climate.

“Humanitarian and security conditions in neighboring Afghanistan could pose additional risks to Pakistan's domestic security in the years ahead,” it said.

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