The downgrade reflects further sharp deterioration in external liquidity and funding conditions, and the decline of foreign-exchange (FX) reserves to critically low levels
HONG KONG: Fitch Ratings has downgraded Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC-‘, from ‘CCC+’. There is no Outlook assigned, as Fitch typically does not assign Outlooks to ratings of ‘CCC+’ or below.
According to the Fitch ratings, the downgrade reflects further sharp deterioration in external liquidity and funding conditions, and the decline of foreign-exchange (FX) reserves to critically low levels.
While it assume a successful conclusion of the 9th review of Pakistan’s IMF programme, the downgrade also reflects large risks to continued programme performance and funding, including in the run-up to this year’s elections.
It said that Liquid net forex reserves of the State Bank were about $2.9 billion on 3 February 2023, or less than three weeks of imports, down from a peak of more than $20 billion at end-August 2021.
Falling reserves reflect large, albeit declining, current account deficits (CADs), external debt servicing and earlier FX intervention by the central bank, particularly in 4Q22, when an informal exchange-rate cap appears to have been in place.
The Agency expects reserves to remain at low levels, though we do forecast a modest recovery during the remainder of 2022-23, due to anticipated inflows and the recent removal of the exchange rate cap.
External public-debt maturities in the remainder of the fiscal year ending June 2023 (FY23) amount to over $7 billion and will remain high in 2023-24.
Of the $7 billion remaining for 2022-23, $3 billion represent deposits from China (SAFE) that are likely to be rolled over, and $1.7 billion are loans from Chinese commercial banks which we also assume will be refinanced in the near future.
The SAFE deposits are scheduled to mature in two instalments: $2 billion in March and $1 billion in June.
Pakistan’s Current Account Deficit (CAD) was $3.7 billion in 2nd half2021-22, down from $9 billion in 2nd half 2020-21. As such, the Agency forecasts a full-year deficit of $4.7 billion (1.5% of GDP) in FY23 after $17 billion (4.6% of GDP) in FY22.
The narrowing of the CAD has been driven by restrictions on imports and FX availability, as well as by fiscal tightening, higher interest rates and measures to limit energy consumption.
Reported backlogs of unpaid imports in Pakistan’s ports indicate that the CAD could increase once more funding becomes available. Nevertheless, exchange-rate depreciation could limit the rise, as the authorities intend for imports to be financed through banks, without recourse to official reserves.
Shortfalls in revenue collection, energy subsidies and policies inconsistent with a market-determined exchange rate have held up the 9th review of Pakistan’s IMF programme, which was originally due in November 2022.
The Rating Agency understand that completion of the review hinges on additional front-loaded revenue measures and increases to regulated electricity and fuel prices.