Fitch Ratings downgrades Pakistan’s foreign-currency IDR to ‘CCC-’

Fitch Ratings on Tuesday 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”.

“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 (FX) reserves to critically low levels.

“While we assume a successful conclusion of the 9th review of Pakistan’s International Monetary Fund (IMF) programme, the downgrade also reflects large risks to continued programme 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.”

Pakistan’s external position under significant stress: Moody’s

“Liquid net forex reserves of the State Bank of Pakistan were about $2.9 billion on 3 February 2023, or less than three weeks of imports, down from a peak of more than $20 billion at end-August 2021,” it added.

“Falling reserves reflect large, albeit declining, current account deficits (CADs), external debt servicing and earlier forex intervention by the central bank, particularly in 4Q22, when an informal exchange-rate cap appears to have been in place.”

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 external public-debt maturities in the remainder of the fiscal year ending June 2023 (FY23) amount to over $7 billion and will remain high in FY24, Fitch said.

Fitch downgrades Pakistan’s issuer default rating to ‘CCC+’ from ‘B-’

“Of the $7 billion remaining for FY23, $3 billion represent deposits from China (SAFE) that are likely to be rolled over and $1.7 billion are loans from Chinese commercial banks which we assume will be refinanced in the near future,” the ratings agency said. “The SAFE deposits are scheduled to mature in two instalments ie $2 billion in March and $1 billion in June.”

The firm noted that Pakistan’s current account deficit (CAD) was $3.7 billion in 2H22, down from $9 billion in 2H21.

“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.

“Nevertheless, exchange-rate depreciation could limit the rise, as the authorities intend for imports to be financed through banks, without recourse to official reserves. Remittance inflows could also recover after they were partly switched to unofficial channels in 4Q22 to benefit from more favourable exchange rates in the parallel market.”

Fitch says PKR to further weaken

Moving on to the International Monetary Fund (IMF) programme, Fitch pointed out that shortfalls in revenue collection, energy subsidies and policies inconsistent with a market-determined exchange rate have held up the 9th review of Pakistan’s IMF programme, which was originally due in November 2022.

“We understand that completion of the review hinges on additional front-loaded revenue measures and increases to regulated electricity and fuel prices,” it said.

The IMF’s conditions are likely to prove socially and politically difficult amid a sharp economic slowdown, high inflation, and the devastation wrought by widespread floods last year, it said.

“Elections are due by October 2023, and former prime minister Imran Khan, whose party will challenge the incumbent government in the elections, earlier rejected an invitation by Prime Minister Shehbaz Sharif to hold talks on national issues, including IMF negotiations.

“Recent funding stress has been marked by the apparent reluctance of traditional allies - China, Saudi Arabia and the United Arab Emirates - to provide fresh assistance in the absence of an IMF programme, which is also critical for other multilateral and bilateral funding.”

Pakistan’s economy is currently undergoing one of its worst crisis in history with foreign exchange reserves depleting to critical levels. Its currency seems to have stabilised, but not before a massive depreciation run that saw it hit record lows earlier this year.