Fitch upgrades Pakistan rating to ‘CCC+’
- Upgrade reflects greater certainty over continued availability of external funding, says credit rating agency
In a key development, Fitch Ratings has upgraded Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC+’ from ‘CCC’. Last year in July, Fitch Ratings had upgraded the country to ‘CCC’ from ‘CCC-’.
“The upgrade reflects greater certainty over continued availability of external funding, in the context of Pakistan’s staff-level agreement (SLA) with the IMF on a new 37-month USD7 billion Extended Fund Facility (EFF),” Fitch said in a statement on Monday.
It said that strong performance on the previous, more temporary IMF arrangement helped Pakistan narrow fiscal deficits and rebuild foreign exchange (FX) reserves, and further improvements are likely.
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“Nevertheless, Pakistan’s large funding needs leave it vulnerable if it fails to implement challenging reforms, which could undermine programme performance and funding,” it warned.
Fitch expects IMF Board approval for the $7 billion, 37-month programme for Pakistan by end-August.
However, before the approval, “the government will have to obtain new funding assurances from bilateral partners, chiefly Saudi Arabia, the UAE and China, totalling about $4-5 billion over the duration of the EFF.
“We believe this will be achievable, given the strong past record of support and significant policy measures in the recent budget for the fiscal year ending June 2025 (FY25),” it said.
On the previous IMF programme, Fitch said Pakistan successfully completed its nine-month Stand-by Arrangement with the global lender in April.
“Over the past year, the government raised taxes, cut spending and raised electricity, gas and petrol prices. The government also all but eliminated the gap between the interbank and parallel market exchange rates through a crackdown on the black market and regulation of exchange houses,” it said.
It may be noted that Fitch does not assign outlooks to sovereigns with a rating of CCC+ or below.
Back in December 2023, Fitch maintained Pakistan’s ratings to CCC, saying that the rating reflects “high external funding risks amid high medium-term financing requirements”.
In a statement, the Ministry of Finance termed the rating upgrade a “positive shift” in Pakistan’s economy.
“This improvement comes after the IMF staff-level agreement, reflecting a positive shift in the country’s economic situation,” it said.
Meanwhile, market experts hailed the development as a positive for the South Asian economy, which has registered low economic growth for the last two years.
“This is a positive development for the country,” Saad Hanif, Head of Research at Ismail Iqbal Securities, told Business Recorder.
“The ratings are particularly important to attract foreign investment. The improvement in ratings indicate that Pakistan’s external funding risks have minimised owing to the IMF programme,” it said.
“This will improve FDI and hot money flow into the country,” he added.
Meanwhile, talking about macroeconomic indicators, Fitch on Monday forecast “the current account deficit (CAD) to stay relatively contained at about $4 billion (about 1% of GDP) in FY25, after about $700 million in FY24, given tight financing conditions and subdued domestic demand”.
Fitch said contractionary economic and fiscal policies, lower commodity prices and rupee depreciation have driven the sharp narrowing of the CAD from over $17 billion in FY22.
“FX shortages have eased with the return of remittances to the official banking system, reversing their decline in 2H22,” it said.
Fitch noted that besides the CAD, the authorities in Pakistan face over $22 billion in external public debt maturities in FY25.
“Of the total maturities, $13 billion is in the form bilateral deposits and loans that are regularly rolled over, including nearly $4 billion in liabilities of the State Bank of Pakistan (SBP).
“Maturing debt also includes nearly $4 billion from Chinese commercial banks, and $4 billion from multilateral creditors,” it said.
On the external front, Fitch was of the view that the country’s foreign exchange reserves have recovered, but are still low.
“The SBP is rebuilding FX reserves amid inflows of new funding and limited CADs. We estimate official gross reserves, including gold, rose to over $15 billion at June 2024 (about three months of imports), from nearly U$10 billion at end-June 2023, and we expect them to rise to nearly $22 billion by FYE26, close their 2021 peak.”
Fitch noted that the SBP’s narrower measure of net liquid FX reserves (excluding gold and FX reserve deposits of banks) recovered to over $9 billion at June 2024. “The SBP has reduced its forward liabilities to local banks and is approaching a balanced net foreign asset/liability position,” it said.
On the fiscal front, Fitch said that half of the revenue effort under the EFF is frontloaded in the FY25 budget, “which was prepared together with IMF staff and projects a headline deficit of 5.9% of GDP and a 2.0% primary surplus (FY24 estimate: 7.4% and 0.4%, respectively).
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“Our forecasts assume partial implementation of this and project a primary surplus of 0.8% of GDP and an overall fiscal deficit of 6.9% of GDP in FY25, improving to 1.3% of GDP and 6% of GDP, respectively, in FY26. Besides tax measures, the budget assumes a doubling of SBP dividends to 2% of GDP, and a doubling of provincial surpluses to 1% of GDP,” it said.
On the political front, Fitch expressed that the close outcome of the February elections delivered a weaker-than-expected mandate for Prime Minister Shehbaz Sharif’s PMLN party.
“PML-N and its allies command only a slim majority in the National Assembly after a recent Supreme Court ruling re-allocating reserved seats in favour of independents linked with former prime minister Imran Khan’s PTI party. Khan has been in prison since May 2023, but remains popular,” it said.
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