Moody’s Investors Service said that it has downgraded Pakistan’s foreign and local currency bond ratings by one notch to Caa1 from B3. The short-term ratings remain unchanged at not-prime. The outlook is negative.
The credit ratings agency (CRA) said that there were four key drivers for its rating action:
- A deterioration in Pakistan’s balance of payments over the past year.
- The country’s looming large repayments to the International Monetary Fund (IMF).
- The dwindling level of official foreign exchange (FX) reserves.
- Institutional weakness stemming from political instability and constrained government finances.
Moody’s added that the main driver of its one-notch downgrade of Pakistan’s government bond ratings was the increasing strain on the country’s external payments position as a result of a rising trade deficit and decline in capital inflows. Moreover, weak government finances, structural inflationary pressures and domestic political uncertainties were adding to Pakistan’s external vulnerabilities and debt sustainability, thereby compounding the downward pressure on sovereign creditworthiness.
The CRA noted that Pakistan recorded a small current account surplus in fiscal year2010-11, but this reverted to a deficit of US$3.8bn over the period from July 2011 to May 2012. The reversal largely reflected stalled export growth over the 11 months, which contrasted with a 28.9% expansion in 2010-11, due to the collapse in demand from Europe, Pakistan’s main export market, and weakening cotton prices.
In addition to the deteriorating current account deficit, Moody’s also expects further pressure on Pakistan’s balance of payments. Foreign direct investment (FDI) has been on a secular decline since the US$5.4bn inflow in 2008. Based on recent trends, the CRA expects FDI to fall short of US$1bn in 2012. At the same time, Pakistan’s import bill, a significant portion of which consists of subsidised petroleum products, remains sensitive to global oil price developments.
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The country is expected to survive the review, which it must do to retain its place in the European Central Bank’s asset purchase programme.
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