Moody's upgrades Pakistan's outlook from 'under review for downgrade' to 'stable', maintains B3 rating.
Moody’s on Saturday confirmed Pakistan’s credit rating at B3 with the outlook at stable after it had initiated a review for downgrade in May earlier this year.
The stable outlook reflects Moody’s view that the pressures Pakistan faces in the wake of the coronavirus shock and prospects for its credit metrics, in general, are likely to remain consistent with the current rating level.
The rating agency said it expects Pakistan’s economic growth to be positive but will be low around 1 per cent-2 per cent for the ongoing fiscal year 2020-21 ending June 2021 after experiencing a recession in the previous fiscal year 2019-2020.
It added that Pakistan’s economy was relatively closed with a low reliance on exports and movement restrictions due to the pandemic will keep economic activity below the pre-outbreak levels for some time.
Meanwhile, Moody’s shared that the slow economic recovery will impact government revenue, keeping the fiscal deficit wide at around 8-8.5 per cent of GDP in the ongoing fiscal year (FY21) which will be at similar levels compared to FY20.
This, in turn, will result in the government’s debt burden remaining high at around 90 per cent of GDP by the end of FY21.
However, external financing needs have declined compared to the fiscal year 2018-19 because of a narrow current account deficit, which occurred due to macroeconomic adjustments over the past two years and continues to be assisted by effective policies including currency flexibility.
Moreover, it forecast the current account deficit (CAD) for ongoing FY21 at 2 per cent of GDP compared to 1.1 per cent recorded in FY20 and substantially narrower than the average of around 5.5 per cent in FY19.
“Stability in the balance of payments will, in turn, allow the State Bank of Pakistan, the central bank, to keep monetary policy accommodative as inflation declines. This keeps a lid on borrowing costs for the government domestically and lends further support to debt affordability,” it explained.
“The coronavirus pandemic is weighing on economic activity in Pakistan, resulting in lower tax revenue, a wider fiscal deficit, and a higher debt burden for the government.
While the continued spread of the virus poses downside risks to the economy and government finances, financial and technical support from development partners mitigates external vulnerability and liquidity risks,” said Moody’s.
“The government’s commitment to its current International Monetary Fund (IMF) Extended Fund Facility (EFF) continues to unlock a large financial envelope that Moody’s expects will cover its external financing needs over the next 12-18 months and provides an anchor for ongoing fiscal reforms.
Effective macroeconomic policies lower interest payments, supporting debt affordability, and provide policy buffers,” it added.
Moody’s upgrades Pakistan’s outlook from ‘under review for downgrade’ to ‘stable’, maintains B3 rating
---Moody's forecasts current account deficit (CAD) for ongoing FY21 at 2 per cent of GDP compared to 1.1 per cent recorded in FY20
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