S&P Downgrades Outlook On Pakistan's Long-Term Ratings To 'Negative'

Ratings agency S&P Global has revised Pakistan's long-term ratings from 'stable' to 'negative' as the cash-strapped nation continues to grapple against the backdrop of higher commodity prices, the rupee's depreciation and tighter global financial conditions.

The New York-based agency on Thursday affirmed its ‘B-’ long-term and ‘B’ short-term sovereign credit ratings on Pakistan, as well as ‘B-’ long-term issue rating on the country’s senior unsecured notes and Sukuks, which are Islamic financial certificates equivalent to bonds in Western finance.

“Pakistan’s external position weakens against a backdrop of higher commodity prices, tighter global financial conditions, and a weakening rupee,” the agency said in a statement.

The Pakistani rupee continued its downward slide against the US dollar, closing at a record-low at 239.94 against the greenback in the intra-bank market on Thursday.

The agency said it could lower its ratings if Pakistan’s external indicators continued to deteriorate, but the outlook could be revi­sed to stable if its external position stabilises and improves.

The negative outlook reflects the growing risks to Pakistan's external liquidity position over the next 12 months amid an increasingly difficult economic landscape.

Referring to Pakistan's institutional and economic profile, S&P said near-term reform prospects are dependent upon political stability and macroeconomic conditions.

S&P's forecast on Pakistan comes barely a week after international credit rating agency Moody’s changed the country's credit rating to B3 negative, while Fitch demoted the country's economy from stable to negative.

Evidence of improvement could include a sustained rise in usable foreign exchange reserves.

While domestic demand is showing signs of  recovery, the country is now facing a new challenge in the form of rising prices, particularly for staple goods, the agency said.

“Prevailing price dynamics, including costlier edible oils, fuel, electricity, and grains, are likely to hurt the pace of private consumption growth in the current fiscal year ending June 2023,” it said.

“The Pakistan government has considerable external indebtedness and liquidity needs, and an elevated general government fiscal deficit and debt stock,” it stated.

Pakistan has made progress towards implementing economic and fiscal reforms under its Extended Fund Facility (EEF) with the International Monetary Fund (IMF).

Pakistan and the IMF reached a preliminary staff-level agreement earlier this month on the combined seventh and eighth reviews for a USD 6 billion loan facility for the cash-strapped country.

The agreement paves the way for the release of the much-awaited USD 1.17 billion loan tranche that had been on hold since earlier this year.

“Although the impact of these more difficult macroeconomic conditions has been partially mitigated by various reform initiatives undertaken by the government over the past few years, the risk of continued deterioration in key metrics, including external liquidity, is rising,” the agency said.

“However, the current inflationary environment complicates the implementation of such policies. Achieving a primary fiscal balance surplus, and boosting its stock of foreign exchange reserves, will also be more difficult for the government to achieve against the current external backdrop,” it explained.

The S&P said that with parliamentary elections due by August 2023, political uncertainty will remain elevated over the coming quarters.

It said that although Pakistan’s security situation has gradually improved over recent years, ongoing vulnerabilities weaken the government’s effectiveness and weigh on the business climate.