ISLAMABAD:
Fitch on Tuesday improved Pakistan’s credit worthiness from a substantial default risk nation to highly speculative with limited margin of safety but with a stable outlook, affirming that the government has been on a solid path of fiscal stability and structural reforms.
Fitchone of the three global rating agenciesfor the first time in three years upgraded Pakistan by one degree from CCC plus, having substantial default risk, to B negative. The B negative reflects material default risk is present but also there is a limited margin of safety.
The B negative rating also shows that the country is meeting its financial commitments but the capacity for continued payment is vulnerable to deterioration in the business and economic environment.
“We are back where we were three years ago,” said Finance Minister Muhammad Aurangzeb while welcoming Fitch’s decision. He said that B minus is a very good point from where we will build on and the government will get a solid B rating.
After one notch improvement, Pakistan is still two scales below the BBB rating, which is considered a good credit quality score and will reduce the nation’s borrowing cost in the international capital markets.
Prime Minister Shehbaz Sharif also welcomed the Fitch decision.
Due to default risk rating Pakistan was unable to venture in the global capital markets, as the investors were demanding extremely high prices for Pakistani sovereign bonds. The new rating is still highly speculative grade but it also offers a window to get slightly lower interest rates.
Due to increasing vulnerabilities, Fitch had downgraded Pakistan to CCC in July 2022. After Fitch, Standard and Poor’s, the second global rating agency, is also expected to make a decision on Pakistan’s rating in the first week of May.
The finance minister said that the rating upgrade is a testimony that there was a permanency in Pakistan’s macroeconomic stability and the country was on a firm path of structural reforms needed to “move towards sustainable inclusive growth without gold rush”.
The upgrade reflects Fitch’s increased confidence that Pakistan will sustain its recent progress on narrowing budget deficits and implementing structural reforms, supporting its IMF programme performance and funding availability, according to Fitch.
The rating agency expects that Pakistan will continue the tight economic policy settings to support recovery of international reserves and contain external funding needs. But it said that implementation risks remain and financing needs are still large.
“Following this development, the country is expected to see increased investment, trade, job opportunities, industrial growth, and access to additional financial resources,” said Aurangzeb.
Fitch noted that “the current apparent consensus within Pakistan on the need for reform could weaken over time and technical challenges will also be significant”.
It said that global trade tensions and market volatility could create external pressures on Pakistan, but risks are mitigated by lower oil prices and the country’s low dependence on exports and market financing. International trade tensions could hurt Pakistan’s goods exports, with exports to the US, mostly textiles, accounting for 35% of the total exports in the last fiscal year, it added.
While commenting on the implementation of the IMF programme, Fitch said that Pakistan performed well on quantitative performance criteria, particularly on reserve accumulation and the primary surplus, although tax revenue growth fell short of its indicative target.
Provincial governments have also legislated increases in agricultural income tax, a key structural benchmark, it added.
Fitch predicted that Pakistan will meet its budget deficit target and said the deficit will “narrow to 6% of GDP in the fiscal year ending June 2025 and around 5% in the medium term”. It said that the primary surpluses will more than double to over 2% of GDP in FY25. Shortfalls in tax revenue, in part due to lower-than-expected inflation and imports, will be offset by lower spending and wider provincial surpluses, it added.
It noted that Pakistan’s debt was on a lower path in the last fiscal year but “the debt ratio will still tick up in fiscal year 2025 due to a rapid decline in inflation and will remain above the forecast ‘B’ median of just over 50%. It said that a gradual decline over the medium term will continue reflecting tight fiscal policy, nominal growth and a re-pricing of domestic debt at lower rates.
Fitch sees inflation rate slowing down to average 5% in this fiscal year due to fading base effects from several rounds of energy price hike, before picking up again to 8% in the next fiscal year. “We expect GDP growth to edge up to 3% in this fiscal year.
The rating agency noted that “informal foreign exchange demand management persists after the loosening exchange rate and import controls, and market reforms in 2023”.
Lower commodity import prices could soften the blow on the trade balance. Remittances, Pakistan’s main source of external receipts, mostly come from the Middle East and tend to be resilient to the economic cycle, it added.
The finance minister hoped that the remittances would now jump to a record $38 billion in this fiscal year after $4.1 billion injection in March.
Fitch said that measures of net foreign exchange reserves are still much lower, reflecting foreign reserve deposits of domestic commercial banks, a Chinese central bank swap line and bilateral deposits at the SBP.
The credit rating sees further increase in Pakistan’s external debt net repayments, excluding $13 billion rollovers. It said that the government will face about $9 billion in external debt maturities in the next fiscal year after over $8 billion in this fiscal year. Both figures exclude $13 billion in bilateral deposits and loans that are regularly rolled over. The next international bond maturity is in September 2025, it added.
While commenting on politics, Fitch said Prime Minister Shehbaz Sharif’s PMLN party and its allies received a mandate that was weaker than we expected in elections in early 2024, although they still have a constitutional majority in the National Assembly and are backed by the military.
It said that former prime minister Imran Khan, imprisoned since May 2023, remains highly popular. Domestic political and economic fractures are compounded by the increased frequency of security incidents along the border with Afghanistan and in Balochistan, according to the rating agency.
#Fitch #upgrades #Pakistans #credit #rating
