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The Fitch Ratings credit agency on Tuesday downgraded Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC-‘ from ‘CCC+,’ noting that it does not typically assign outlooks to sovereign nations with a rating of ‘CCC+’ or below.
In a statement, the U.S.-based credit ratings agency said the latest downgrade—the second in four months—reflected reflects further deterioration in external liquidity and funding conditions. “The downgrade also reflects our view of increased risks of policies potentially undermining Pakistan’s IMF program and official financial support,” it added.
Noting that Pakistan’s foreign exchange reserves were dangerously low, it said this reflected large, “albeit declining,” current account deficits, external debt servicing, and earlier foreign exchange intervention by the central bank. “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,” it said.
While assuming a successful conclusion of the ninth review of the ongoing IMF program, Fitch said the downgrade reflects large risks to continued program performance and funding, including in the run-up to general elections due later this year. “Default or debt restructuring is an increasingly real possibility, in our view,” it said, noting this was despite Finance Minister Ishaq Dar publicly ruling it out recently.
Pakistan’s external public debt maturities in the ongoing fiscal are over $21 billion, mostly to bilateral and multilateral creditors, which mitigates rollover risks, said the agency, adding that Islamabad had already received funding commitments of $2.5 billion from the World Bank and Asian Development Bank. On the current account deficit, it noted it had declined to $3.7 billion in the second half of the last fiscal, down from $9 billion a year earlier. “As such, Fitch forecasts a full-year deficit of $4.7 billion (1.5% of GDP) in FY23 after $17 billion (4.6% of GDP) in FY2022,” it said, noting this was driven by restrictions on imports and foreign exchange reserves’ availability, as well as by fiscal tightening, higher interest rates and measures to limit energy consumption.
However, the agency warned, reported backlogs of unpaid imports in Pakistan’s ports indicated 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,” it said, adding that declining remittance inflows could also recover after they were partly switched to unofficial channels to benefit from more favorable exchange rates in the ‘grey’ market.
On the IMF’s conditions to revive a stalled bailout program, Fitch said they would likely prove socially and politically difficult amid a sharp economic slowdown, high inflation, and the devastation wrought by widespread floods last year. The funding stress, it said, was worsened by the apparent reluctance of traditional allies like China, Saudi Arabia and the U.A.E. to provide fresh assistance without the IMF program.