Pakistan would see a marked weakening in debt metrics because of large gross borrowing needs that raise interest payments when borrowing costs rise, and/or narrow revenue bases that push fiscal deficits wider when interest payments rise, says Moody's Investors Services.
Moody's in its latest report titled "Low-rated sovereigns with large external repayments vulnerable to contagion shocks" stated that the central bank in Pakistan has delivered sizeable rate cuts amounting to 225 basis points in March, but this cut may not sufficiently offset the tightening in financing conditions related to local-currency depreciation.
Sri Lanka, Pakistan (B3 stable) and Egypt (B2 stable) would see a marked weakening in debt metrics because of large gross borrowing needs that raise interest payments when borrowing costs rise, and/or narrow revenue bases that push fiscal deficits wider when interest payments rise.
As for the potential deterioration in debt and debt-affordability dynamics arising from capital outflows that weaken local currencies and tighten domestic financing conditions, Sri Lanka, Pakistan, Egypt, Angola and Ghana (B3 positive) would see a marked weakening of these metrics under the stress test. This is because of their large share of foreign-currency debt, large gross borrowing needs that raise interest payments when borrowing costs rise, and/or narrow revenue bases that push fiscal deficits wider when interest payments rise.
Debt burdens for these five sovereigns under Moody's stress scenario would be well in excess of the median of around 70 percent of GDP for all non-investment grade emerging market (EM) sovereigns, while interest payments for this group will be close to or exceed 40 percent of government revenue, significantly weaker than the median of 12 percent for all sovereigns in it's analysis, maintained in the report.
Moody's further stated that effective policy responses can mitigate the risk of significantly higher debt burdens and lower debt affordability from already weak starting positions. The central banks in Egypt and Pakistan have delivered sizeable rate cuts amounting to 300 basis points and 225 basis points in March, respectively, while Sri Lanka's central bank cut its policy rate by 50 basis points earlier in the year. That said, these cuts may not sufficiently offset the tightening in financing conditions related to local-currency depreciation.
Given stretched fiscal positions, the governments facing the largest potential deterioration in debt dynamics may also find it challenging to raise additional financing to mitigate the economic slowdown, which may compound the weak investor sentiment and spark further capital outflows.