Fitch lowers the nation’s IDR to “CCC+”
According to a rating agency, GDP growth would slow to roughly 2% in FY23 from 6% in FY22.
KARACHI: On the same day that the Asian Development Bank (ADB) approved financing for Pakistan totalling $1.5 billion and the Financial Action Task Force (FATF) upgraded Islamabad from its grey to white list, Fitch Ratings downgraded Pakistan’s long-term foreign-currency issuer default rating (IDR) from “B-” to “CCC+.”
The global rating agency stated in a statement on Friday that the downgrade “reflects significant deterioration in Pakistan’s external liquidity and funding constraints, as well as the decrease of foreign-exchange reserves.”
Additionally, it stated that “Fitch usually does not provide outlooks to sovereigns with a rating of “CCC+” or below.”
It is anticipated that the FATF’s decision to add Islamabad to its white list will increase foreign money inflows, notably those from international investors.
Following Moody’s Investors Service’s lowering of Pakistan’s credit rating from “B3” to “Caa1” around two weeks ago, Fitch announced its most recent rating action.
Ishaq Dar, the finance minister, and his team deemed the judgement “unilateral” and claimed it was founded on “incomplete facts.”
Dar and his team provided an update on Pakistan’s participation in the International Monetary Fund (IMF) loan programme and the full arrangements the nation had made for the payment of its foreign debt, financing of its current account deficit (CAD), and augmentation of its foreign exchange reserves in FY23, totalling about $36–40 billion.
However, neither rating agency paid attention to the impending developments.
The debt-to-GDP ratio for Pakistan, according to Fitch, was 73% in FY22, roughly in line with the current “B” median.
The rating agency continued, “We project debt/GDP to decline to 70% in FY23 and continue falling, boosted by rising inflation and a moderate primary deficit.
The country’s current account deficit (CAD) was predicted to decrease to $10 billion [2.7% of GDP] in FY23, despite the impact of the recent floods on export revenue and import requirements.
According to Fitch, the decision was made in part because of the extensive flooding, which would hinder Pakistan’s attempts to control its twin fiscal and current account deficits.
According to the Fitch release, “The downgrade also reflects our view of increasing risks of actions that might potentially undermine Pakistan’s IMF programme and official financial support.”
The majority of Pakistan’s bilateral and multilateral creditors would be responsible for its over $21 billion in external public debt maturities in FY23, “which reduces the risk of rollover and there are already arrangements to roll over some of them.”
“The reserves have decreased to $7.6 billion, which is less than one month’s worth of import payments and debt repayments, as of the week ending October 14, 2022. At the end of August 2021, they were valued at $20 billion, it added.
According to the authorities, Pakistan recently obtained cash commitments from the World Bank and ADB totalling $2.5 billion; however, the rating agency stated it understood that a large portion of this money was repurposed from ongoing programmes.
According to the statement, “it is yet uncertain to what extent the IMF would be able to loosen Pakistan’s programme targets or increase [the country’s] access under the EFF [Extended Fund Facility].”
Although Fitch anticipated Pakistan would continue to receive payments from its IMF programme, risks to this assumption have increased.
“From October 1, 2022, fuel price reductions [in local markets] might not be compatible with IMF commitments. The October deadline for a quarterly change to the electricity rate has passed, according to Fitch.
The new finance minister has confirmed his or her commitment to the programme, but Fitch said that he or she supports a “strong exchange rate, and may rethink the SBP law that was revised in early 2022 to provide the [central bank] additional autonomy, as previously agreed with the IMF.”
Additionally, it predicted that the country’s fiscal deficit would decrease from 7.9% of GDP (more than Rs5 trillion) in FY22 to 6.2% of GDP (about Rs5 trillion or $23 billion) in FY23 as a result of modest spending constraints and higher taxes.
From 6% in FY22 to around 2% in FY23, according to Fitch, the growth of the gross domestic product (GDP) is expected to slow down due to “fiscal and monetary tightening, high imported inflation, a negative outlook for external demand, and interruptions from flooding.”
This is lower than the government’s initial aim of 5% and the 3.5% anticipated in the IMF programme, but still roughly in line with the government’s prediction.
The slow post-global financial crisis recovery in Pakistan was made worse by the floods of 2010–2011.
The damage from the floods is estimated by the government to be between $10 billion and $30 billion, but reconstruction expenses and the effect on Pakistan’s twin deficits are likely to be smaller.
The rating agency warned that rising political unrest may lead to policy lapses once the current $6.5 billion IMF programme came to an end in June 2023.
Imran Khan, the former prime minister who lost his position in a vote of no-confidence on April 10, was reportedly still exerting political pressure on the current administration by planning demonstrations asking for early elections around the nation.
The PTI, led by Imran, defeated the ruling PML-N in the crucial Punjab province’s July by-elections.
In the October 17 by-elections, the PTI won more seats at the federal and state levels.
Regular elections are scheduled for October 2023, which raises the possibility of policy reversals following the completion of the IMF programme, which is due in June, according to Fitch.
