Fragile external payment position and low reserve adequacy elevated the external vulnerability risk for Pakistan, says Moody''''s Investors Services. Moody''''s in its latest report titled "US dollar appreciation raises credit risk for sovereigns with large external funding needs'''', states that Pakistan is facing elevated external pressures stemming from strong domestic demand and capital-import heavy investments related to the China-Pakistan Economic Corridor (CPEC).
"We expect a current account deficit of 4.8% of GDP this year," maintained the report.
"While reserve coverage of external debt repayments remains adequate for now, we expect that coverage to weaken. Unless capital inflows increase substantially, we see elevated risk of further erosion in foreign exchange reserves. 30% of government debt is denominated in foreign currency," the report adds.
"Pakistan''''s gross borrowing requirements are among the highest in our sovereign rated universe at around 27%-30% of GDP, driven by persistent fiscal deficits and the government''''s reliance on short-term debt, with an average maturity of 3.8 years," the report continues.
Moody''''s further notes that "although Pakistan is not a major recipient of volatile capital inflows, currency depreciation to alleviate external pressures could raise inflation and prompt additional domestic rate hikes, which would pass through to the government''''s borrowing costs and further weaken the government''''s already fragile fiscal position.....strengthening US dollar since mid-April has led to sharp currency depreciation and significant declines in foreign exchange reserves in a number of emerging and frontier market countries, increasing credit risks for those with large external funding needs."
External exposure of 40 emerging and frontier market sovereigns with some of the highest levels of external debt, either in US dollar terms or in relation to the size of their respective economies are as follows: countries among the most vulnerable to a stronger US dollar are Argentina (B2 stable), Ghana (B3 stable), Mongolia (B3 stable), Pakistan (B3 negative), Sri Lanka (B1 negative), Turkey (Ba2 Review for downgrade), and Zambia (B3 stable). Chile (Aa3 negative), Colombia (Baa2 negative), Indonesia (Baa2 stable) and Malaysia (A3 stable) are also exposed, but financial and institutional buffers lower near-term vulnerability.
"Countries with large current account deficits, high external debt repayments and substantial foreign-currency government debt are most exposed to the impact of a stronger US dollar," said Alastair Wilson, Moody''''s Global Managing Director of the Sovereign Risk Group adding that "to the extent that these currency fluctuations reflect capital outflows or significantly lower external inflows, they are credit negative for sovereigns with large external funding needs."
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