Moody’s has upgraded Pakistan’s credit rating from Caa3 to Caa2, reflecting improvements in the country’s macroeconomic conditions and liquidity, although challenges remain. The positive outlook signifies potential for further upgrades if Pakistan continues reform efforts and secures external financing.
Key points from the Moody’s update:
- Rating Upgrade: Pakistan’s local and foreign currency issuer and senior unsecured debt ratings have been improved to Caa2 from Caa3. This upgrade includes the senior unsecured MTN programme rating, which has also been raised to (P)Caa2.
- Positive Outlook: The outlook for Pakistan has shifted from stable to positive, indicating a balanced risk scenario where further improvements in fiscal and economic conditions are possible.
- Macroeconomic Improvement: The upgrade reflects better macroeconomic conditions, with improved government liquidity and external positions. Pakistan’s default risk has decreased, aligning with the Caa2 rating.
- IMF Programme: Moody’s expects the IMF to approve a 37-month Extended Fund Facility (EFF) of $7 billion for Pakistan soon, following a staff-level agreement in July 2024. This programme is crucial for Pakistan’s external financing and economic stabilization.
- Foreign Exchange Reserves: Pakistan’s foreign exchange reserves have roughly doubled since June 2023 but are still insufficient to cover all external financing needs.
- Debt and Financing Needs: Pakistan’s debt affordability is still weak, with significant interest payments expected to consume a substantial portion of government revenue. The country faces external financing needs of about $26 billion for fiscal year 2025, including debt repayments and current account deficit financing.
- Political and Governance Challenges: High political uncertainty and weak governance continue to impact Pakistan’s credit rating. The implementation of reforms and timely completion of IMF reviews are crucial for unlocking further financing and improving fiscal stability.
- Bank Ratings: Moody’s also downgraded five Pakistani banks, reflecting the gap between the sovereign rating and the local currency ceiling due to economic and institutional weaknesses.
In summary, while the upgrade and positive outlook are signs of progress, Pakistan’s ability to sustain reforms, manage debt, and secure external financing will be critical for further improvement in its credit rating.