Moody’s has also upgraded Pakistan’s local currency ceiling to B3 and its foreign currency ceiling to CAA2.
Moody’s Upgrades Pakistan’s Ratings and Outlook, Reflecting Improved Economic Conditions
Moody’s Investors Service has elevated Pakistan’s credit ratings, marking a significant shift in the country’s financial outlook. The agency upgraded Pakistan’s local and foreign currency issuer and senior unsecured debt ratings from CAA3 to CAA2. Additionally, Moody’s revised the country’s outlook from stable to positive, reflecting improving macroeconomic conditions and better government liquidity and external positions.
The upgrade to CAA2 signifies a reduced risk of default, aligning Pakistan’s credit rating with this new level. This positive adjustment is a result of the country’s recent strides in economic stabilization, despite ongoing challenges.
A key factor contributing to this upgrade is Pakistan’s recent staff-level agreement with the International Monetary Fund (IMF). On July 12, 2024, Pakistan and the IMF reached a pivotal agreement for a 37-month Extended Fund Facility (EFF) amounting to $7 billion. The approval of this agreement by the IMF Board in the coming weeks is anticipated to provide further stability to Pakistan’s external financing sources.
Since June 2023, Pakistan’s foreign exchange reserves have approximately doubled, demonstrating an improvement in its external financial position. However, these reserves still fall short of fully covering the country’s external financing needs. Pakistan continues to rely on timely financial support from official partners to manage its external debt obligations effectively.
Despite these improvements, Pakistan’s CAA2 rating still reflects significant challenges. The rating indicates very weak debt affordability, with interest payments expected to consume about half of the government’s revenue over the next two to three years. Additionally, concerns about weak governance and high political uncertainty are factored into the rating.
The positive outlook suggests that there are potential upsides to the current situation. It considers the possibility of further reductions in government liquidity and external vulnerability risks, supported by the ongoing IMF programme. If Pakistan can sustain its reforms, particularly those focused on revenue enhancement, it could see improvements in its debt affordability and overall fiscal position.
The upgrade to CAA2 also applies to the foreign currency senior unsecured ratings for The Pakistan Global Sukuk Programme Co Ltd, with the outlook for these ratings also set to positive. This upgrade underscores Moody’s recognition of the country’s efforts to stabilize and improve its financial standing.
In conjunction with the rating upgrades, Moody’s has also raised Pakistan’s local and foreign currency country ceilings to B3 and CAA2, respectively. The local currency ceiling is now two notches higher than the sovereign rating. This gap reflects the significant role the government plays in the economy, as well as the weak institutions and high political and external vulnerability risks. Similarly, the difference between the foreign currency ceiling and the local currency ceiling takes into account incomplete capital account convertibility and relatively weak policy effectiveness.
The improvements in Pakistan’s credit ratings and outlook highlight the country’s ongoing efforts to stabilize its economy and manage its financial challenges more effectively. The positive adjustments reflect both the progress made and the potential for further gains if current economic and policy measures continue to be implemented successfully.