ISLAMABAD- Moody’s downgraded Pakistan’s local and foreign currency issuer and senior unsecured debt ratings on Thursday from B3 to Caa1. They did this because the devastating floods that hit the country earlier this year increased the risks related to the government’s liquidity and its dependence on the outside world.
In the wake of the devastating floods that have hit the country since June 2022, this decision was made because there are now more risks related to the government’s liquidity, its dependence on the outside world, and its ability to pay its debts. Pakistan’s liquidity and external credit problems have gotten worse because of the floods. The floods have also greatly increased social spending needs, while government revenue has taken a big hit.
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Pakistan’s ability to pay its debts, which has been a credit weakness for a long time, will remain very weak for the foreseeable future. Pakistan won’t be able to pay its debts if it can’t get cheap financing from the market. Instead, it will have to rely heavily on financing from multilateral partners and other official sector creditors.
Moody’s thinks that Pakistan’s IMF Extended Fund Facility (EFF) programme will stay in place and give the IMF and other multilateral and bilateral partners a way to give Pakistan money in the near future.
The Caa1 rating also applies to the Third Pakistan International Sukuk Co. Ltd. and the Pakistan Global Sukuk Programme Co. Ltd.’s backed foreign currency senior unsecured ratings. Moody’s thinks that the Government of Pakistan is directly responsible for the related payment obligations.
Moody’s has lowered Pakistan’s local and foreign currency country ceilings to B2 and CAA1 from B1 and B3, which is the same thing that happened today.
The near- and medium-term economic outlook is getting worse.
Moody’s has cut Pakistan’s real GDP growth for fiscal year 2023 from 3-4% before the flood to 0-1%. All parts of the economy will be hurt by the floods, but agriculture, which makes up about a quarter of the economy, is likely to be hit the hardest. Moody’s thinks that growth will pick up next year as the economy recovers from the floods, but it will still be below average.
Prices will go up even more because of the floods, at a time when inflationary pressures are already high. From July to September 2022, the average inflation rate was 25% per month. Moody’s thinks that inflation will rise to 25-30% on average in fiscal 2023, up from 20-25% before the flood. As households face higher costs of living for a longer period of time, social risks may rise, which would have bad economic and financial effects.
Debt sustainability risks go up when the cost of debt goes down.
The growth shock will cause the government to get less money, but the cost of rescue and relief operations will cause the government to spend more. Moody’s thinks that the fiscal deficit will grow from its pre-flood estimate of 5-6% of GDP to 7-8% of GDP in fiscal 2023. In the next few years, there will probably still be a lot of pressure on the public finances, since reconstruction and social needs will keep costs high.
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So, Pakistan’s ability to pay back its debt, which is already one of the worst among Moody’s sovereign rates, will get worse. Moody’s predicts that interest payments will rise to about 50% of government revenue in fiscal 2023, up from 40% in fiscal 2022, because interest rates are going up and the government isn’t bringing in as much money. They will stay at this level for the next few years. When a big chunk of the government’s income goes to paying interest, it becomes harder for the government to pay off its debt and meet the people’s basic social spending needs at the same time.
In the meantime, the government’s debt as a percentage of its income is very high, at about 600% in fiscal 2022. This is because the government has a narrow source of income. Moody’s thinks that this ratio will continue to rise to 620-640% in fiscal 2023, which is much higher than the median of 320% for Caa-rated sovereigns, even though the debt-to-GDP ratio will be lower at 65-70% in fiscal 2023.
