Fitch downgrades Pakistani currency's IDR to CCC-
Business
It reflects major risks in run-up to elections, possibility of default/debt restructure increasing
Fitch Ratings has reduced Pakistan's long-term foreign currency issuer default rating (IDR) on Tuesday from "CCC+" to "CCC-" and provided no outlook as is customary for ratings of CCC+ or below.
"Default or debt restructuring is an increasingly plausible scenario," claims Fitch. The report said, "The downgrade reflects a worsening decline in external liquidity and funding circumstances as well as the substantial depletion of foreign currency (FX) reserves.”
"While we anticipate that the 9th review of Pakistan's IMF program will be satisfactorily completed the downgrade also reflects major risks to program performance and funding particularly in the run-up to this year's elections," the rating agency wrote. According to us the possibility of a default or debt restructure is increasing, Fitch stated.
"On February 3, 2023, the State Bank of Pakistan's (SBP) liquid net foreign currency reserves were about $2.9 billion, down from a peak of more than $20 billion at the end of August 2021, or less than three weeks' worth of imports.
“The settlement of external debt, declining current account deficits (CADs) and earlier foreign exchange intervention by the central bank—particularly in 4Q22 when an apparent informal exchange-rate limit was in place—are all reflected in declining reserves.”
In March $2 billion in SAFE deposits are expected to mature and in June $1 billion. Pakistan's current account deficit (CAD) reduced from $9 billion in 2H21 to $3.7 billion in 2H22, the rating agency stated.
As a result the rating agency has predicted a full-year deficit of $4.7 billion (1.5% of GDP) in FY23 which will follow an FY22 deficit of $17 billion (4.6% of GDP). The CAD has narrowed as a result of restrictions on imports and currency availability, budgetary constraint, rising interest rates and measures to cut back on energy use.
According to Fitch, backlogs of purportedly unpaid imports in Pakistani ports indicate that the CAD will increase as more money becomes available.
Moving on to the International Monetary Fund (IMF) program, Fitch stated that problems with revenue collection, energy subsidies and policies at odds with a market-determined exchange rate were to blame for the delays in the 9th review of Pakistan's IMF program which was initially scheduled for November 2022.
Polls are slated to take place in October 2023 and Shehbaz Sharif's proposal to have discussions about national issues including IMF negotiations was previously rejected by former prime minister Imran Khan whose party will oppose the present administration in those elections, it further stated.
Pakistan’s allies China, Saudi Arabia and the United Arab Emirates are hesitant to provide further assistance in the absence of an IMF program which is also necessary for other multilateral and bilateral loans, Fitch stated.
