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Pakistan Economy: Credit Rating Agencies turning "Negative"

• Moody’s has changed outlook of Pakistan’s credit rating to “Negative” from “Stable” while maintaining country’s rating at “B3” (highly speculative). It should be noted that prior to Moody’s announcement, Fitch changed its outlook to “Negative” from “Stable” in Jan’18 while affirming the rating at “B”.
• Standard & Poor’s (S&P) has so far maintained Pakistan’s rating at “B” with “Stable” outlook in recent few months. A similar response from S&P cannot be ruled out in the immediate future where it can potentially downgrade the country’s outlook to “Negative”.
• Key reasons cited by Moody’s in its review are: 1) deterioration in balance of payments; 2) low foreign exchange reserves; 3) increasing debt burden/repayments and 4) fiscal pressures. Last time Moody’s had downgraded Pakistan’s credit rating in July 2012, where it downgraded both the rating and outlook to “Caa1” (from “B3”) and “Negative” (from “Stable”) respectively.
• The reasons cited by Moody’s in 2012 are very similar to the reasons stated now. Given this, it may now be expected that Moody's can potentially downgrade the country’s rating if there is no visible improvement in macroeconomic indicators, which currently stands at “B3”.
• Moody’s in its review expects Pakistan external account to remain under significant pressure and expects foreign exchange import cover (US$10bn as of June 14, 2018 with import cover of around 2x) to fall to 1.7x-1.8x in FY19 with the external financing gap to be largely met by increased foreign currency borrowing, which will add to the country’s debt burden.
• To further highlight external account concerns, State Bank of Pakistan (SBP) in a separate announcement yesterday, reported Current Account Deficit (CAD) for May 2018 at US$1.9bn, which was higher than expectations. For the period Jul-May 2018, CAD was recorded at US$15.9bn (up 43.3%) over last year with full year CAD now expected at US$18.0bn (5.8% GDP) compared to previous year’s CAD of US$12.6bn (4.2% GDP).
• Moodys has termed the country debt to GDP of over 70% as “relatively high” and has shown concern on the country’s debt repaying capacity given low revenue generation. Moodys has further highlighted the expanding fiscal account, where the fiscal deficit has already exceeded 6% in the 11-month period Jul-May 2018.
• In response to rising economic concerns and retaliatory actions by credit rating agencies, Pak Eurobond yields have been rising.