Sharp boost in reserves is credit positive: Moody's

The Pakistan (Caa1 negative) central bank last Friday announced that the country's total liquid foreign exchange reserves had risen to $9.4 billion as of 7 March, from $7.6 billion a month earlier. Given the decrease in reserves last year, this sharp turnaround is credit positive and signals improving external liquidity, reducing looming repayment risks.
Continued strengthening in the balance of payments position, in conjunction with the implementation of structural reforms under the International Monetary Fund's (IMF) Extended Fund Facility, would help stabilise Pakistan's credit profile, according to excerpts from "Moody's Credit Outlook", March 17, 2014 issue.
Moody's said despite a modest current account deficit of 1 percent of GDP in fiscal 2013 (ended 30 June 2013), Pakistan's foreign exchange reserves declined to $7.6 billion in early February 2014 from $13.5 billion a year ago because of outflows of debt and equity and large repayments to the IMF on a previously suspended loan agreement. Net reserves with the State Bank of Pakistan (SBP), a narrower but more appropriately used measure, were even lower, at a meager $2.8 billion, but rose to $4.6 billion in the first week of March. Repayments due this year alone total $2.5 billion but are mostly front-loaded; these would have further weighed on reserves, leaving a very slim cushion for dealing with a worsening current account or financial account developments.
The credit rating agency said the marked improvement in foreign reserves was due to support from bilateral lenders and higher remittances. In its first review under the IMF's EFF completed in December 2013, Pakistan achieved the quantitative performance criteria with the exception of the net international reserves target. To boost reserves, the SBP undertook corrective action through higher policy rates, purchases in the foreign exchange market, and greater exchange rate flexibility.
Although the rating agency expects reserves to edge higher as a result of these measures and as repayments to the IMF taper later this year, the quantity and pace of increase was a surprise. It estimates that the reserves position would have been tight through the first half of fiscal 2015, and kept its External Vulnerability Indicator (EVI) at 120 percent. The EVI gauges whether foreign reserves are adequate to cover external debt maturing in the next year. An EVI above 100 percent indicates a condition of heightened vulnerability to a loss of investor confidence and a sudden stop in credit.