Global rating agency Fitch on Tuesday downgraded Pakistan’s long-term foreign currency issuer default rating to ‘CCC-’ from ‘CCC+’, citing further worsening in liquidity and policy risks along with pressure on foreign exchange reserves. The drop comes four months after Fitch revised down the ranking to CCC+.
The agency did not assign any outlook since typically it does not assign outlooks to sovereigns with a rating of ‘CCC+’ or below.
Fitch said that the downgrade reflected a further sharp deterioration in external liquidity and funding conditions, along with the decline of foreign exchange reserves to “critically low levels”.
“While we assume a successful conclusion of the ninth review of Pakistan’s IMF (International Monetary Fund) programme, the downgrade also reflects large risks to continued programme performance and funding, including in the run-up to this year’s elections. Default or debt restructuring is an increasingly real possibility, in our view,” said the New York-based agency — one of the three major global rating agencies.
The agency said that FX reserves were only about $2.9 billion on February 3, or less than three weeks of imports, noting that it was down from a peak of more than $20bn at the end of August 2021. “Falling reserves reflect large, albeit declining, current account deficits, 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.
“We expect reserves to remain at low levels, though we do forecast a modest recovery during the remainder of FY23, due to anticipated inflows and the recent removal of the exchange rate cap,” the agency said.
It said another factor for the rating downgrade was the large refinancing risk with external public debt maturities in the remaining fiscal year amounting to over $7bn, adding that they would remain high in the next fiscal year as well.
The agency also noted that although the CAD was declining, it could widen again.
“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. Remittance inflows could also recover after they were partly switched to unofficial channels in 4Q22 to benefit from more favourable exchange rates in the parallel market,” the agency explained.
Fitch also highlighted difficult IMF conditions, a challenging political context and funding contingent on the IMF programme as other factors for the rating downgrade.
“Shortfalls in revenue collection, energy subsidies and policies inconsistent with a market-determined exchange rate have held up the ninth review of Pakistan’s IMF programme, which was originally due in November 2022. We understand that completion of the review hinges on additional front-loaded revenue measures and increases to regulated electricity and fuel prices.