Moody’s slashes Pakistan’s rating deeper into junk over sharp deterioration of economy

Moody’s Investors Service has downgraded Pakistan’s sovereign rating to junk territory, maintaining a negative outlook on the country following a sharp downturn in the economy following recent floods.

Moody’s said in a statement late Thursday that the country’s local and foreign currency issuers and senior unsecured debt ratings had been downgraded from B3 to Caa1. Such ratings make access to the capital markets and funding more difficult.

Moody’s said: “The decision to downgrade is due to heightened government liquidity and external vulnerability risks, as well as heightened debt sustainability risks, following the devastating floods that hit the country from June 2022 onwards. is the cause,” he said.

“The floods have exacerbated Pakistan’s liquidity and external credit weakness, severely hurting government revenues while significantly increasing social spending needs. The affordability of some debt will remain very weak for the foreseeable future.”

Rising global prices and delayed policy action by the Pakistani government have hit the country’s finances, leading to a sharp depreciation of the exchange rate, soaring inflation and a decline in foreign exchange reserves. Heavy rains and floods, which have submerged his third of the country and killed more than 1,000 people, are putting great pressure on the sluggish economy.

Before the floods, the country was struggling to recover from the floods as a weakening economy forced the government to raise fuel prices by more than 20% this year. Short- and medium-term economic prospects have deteriorated sharply as a result of the floods. The government’s preliminary estimate puts the economic loss of the floods at about $30 billion, which is his 10% of the country’s gross domestic product.

In August, the International Monetary Fund contributed approximately $1.1 billion to Pakistan as part of the seventh and eighth reviews of Pakistan’s relief program. The fund also agreed to extend the program for one year through the end of June 2023, increasing total funding by approximately $940 million.

With the release of funds, the total support extended by Washington-based lenders under this program will be approximately $6.5 billion.

The country’s IMF loan program, agreed in 2019, had stalled under former Prime Minister Imran Khan’s government, which withdrew subsidy agreements and failed to improve tax revenues, but Pakistan and the fund signed a staff deal in July. Reopened level agreements and reopened funding facilities. .

“Pakistan will rely heavily on financing from multilateral partners and other public sector creditors to finance its debt service, as affordable market financing is not available,” Moody’s said. would,’ he said.

The rating agency said it hoped Pakistan’s IMF program would be sustained and help secure funding from other multilateral and bilateral partners in the short term.

Government agencies say the country’s economic outlook is bleak in the near-term as rising social and political risks make it difficult for the government to implement reforms, including revenue-generating measures to boost public finances and alleviate liquidity stress. expected to deteriorate in the short and medium term. .

The floods also raise Pakistan’s external funding needs, increasing the risk of a balance of payments crisis, and the negative outlook also captures the risks that could extend to private sector creditors if debt restructuring is needed, it said. Moody’s said.

The agency forecasts 0% to 1% GDP growth for Pakistan’s fiscal year 2023, which runs to the end of June 2023. This compares with previous projections of 3% to 4% before the flood.

“Floods will affect all sectors, with the agricultural sector, which accounts for about a quarter of the economy, likely to be more severely affected,” Moody’s said.

Agriculture accounts for about 20% of GDP and exports, and about 40% of total employment. About 70% of the total population lives in rural areas.

As the economy recovers from the floods, government agencies expect growth to pick up next year, but below previous trends.

According to Moody’s, inflation in the country, which averaged 25% in July-September 2022, is projected to rise to an average of 25% to 30% in fiscal 2023.

Interest payments in Pakistan are estimated to increase from 40% of government revenues in FY2022 to around 50% in FY2023 as a result of rising global interest rates and weakening revenue collections, and to remain stable at this level for the next few years. increase.

The current account deficit is expected to widen from 3.5% to 4.5% of GDP in FY23. The country’s foreign exchange reserves, which cover less than two months of imports, limit Pakistan’s ability to withdraw them significantly to service its debts. The need to pay for imports without jeopardizing the balance of payments crisis, the agency said.

Updated: Oct 7, 2022, 7:41 AM