Jul 28, 2022 07:00 pm
On July 28, 2022, S&P (Standard & Poor) Global Ratings revised the outlook on Pakistan's long-term ratings to negative from stable. We also affirmed our 'B-' long-term and 'B' short-term sovereign credit ratings on Pakistan, as well as our 'B-' long-term issue rating on Pakistan's senior unsecured notes and sukuk trust certificates.
The negative outlook reflects growing risks to Pakistan's external liquidity position over the next 12 months amid an increasingly difficult economic landscape.
“We may lower our ratings if Pakistan's external indicators continue to deteriorate to the extent that the government's commitments appear to be unsustainable in the long term. Downward pressure on the ratings would emerge if financial support from bilateral and multilateral partners quickly erodes, or usable foreign exchange reserves fall further to levels indicating distress in servicing Pakistan's external debt obligations,” statement from S&P.
“Conversely, we may revise the outlook to stable if Pakistan's external position stabilizes and improves from current levels. Evidence of improvement could include a sustained rise in usable foreign exchange reserves,” they added further.
Rationale
S&P revised the outlook to negative to reflect Pakistan's weakening external metrics against a backdrop of higher commodity prices, tighter global financial conditions, and a weakening rupee. The Pakistan government has considerable external indebtedness and liquidity needs, and an elevated general government fiscal deficit and debt stock. 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.
Institutional and economic profile: Near-term reform prospects dependent upon political stability and macroeconomic conditions
• The global economic slowdown poses fresh risks to Pakistan's post-pandemic recovery.
• S&P expects Pakistan to achieve moderate growth over the next few years, but tighter domestic monetary conditions and elevated inflation are likely to weigh on activity.
• Pakistan's government has indicated a greater willingness to implement difficult fiscal reforms, but these policies will be challenged by inflation and political risk over the next 12 months.
Pakistan's economy continues to rebound from a pandemic-driven slowdown. Domestic demand continues to recover, but is now facing a new challenge in the form of rising prices, particularly for staple goods. 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.
Pakistan has made progress toward implementing economic and fiscal reforms under its Extended Fund Facility (EFF) with the IMF, marked most recently by the staff-level agreement reached on the seventh and eighth reviews of the program. Disbursements under the EFF, which began in July 2019, amount to approximately US$3 billion so far, with an expected US$1.2 billion likely to be allocated soon. The latest staff-level agreement, which is subject to approval by the IMF's executive board, was reached following an extended period of discussions between the government and IMF officials. The agreement reflects the government's increasing commitments made over recent weeks to fiscal consolidation in its fiscal 2023 budget.
Pakistan's current government, which took office in April 2022 following a successful no-confidence vote against former Prime Minister Imran Khan, has adopted a variety of measures in order to stabilize its fiscal position and to more closely align with IMF program objectives. 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.
With parliamentary elections due by August 2023, the current government has limited time in which to implement meaningful economic reforms, especially those that may imperil electoral support for coalition members. Political uncertainty will remain elevated over the coming quarters, in our view.
The ratings on Pakistan remain constrained by a narrow tax base and domestic and external security risks, which are elevated. Although the country's security situation has gradually improved over recent years, ongoing vulnerabilities weaken the government's effectiveness and weigh on the business climate. Humanitarian and security conditions in neighboring Afghanistan could pose additional risks to Pakistan's domestic security in the years ahead.
Pakistan's economy achieved a solid expansion in fiscal 2022, with real GDP growth hitting an estimated 5.5% on favorable base effect and a recovery in economic activity in line with the relaxation of pandemic-related restrictions. Nevertheless, growth momentum will be countered by an expected slowdown in the global economy, high inflation, and rapidly tightening financial conditions.
The Pakistani rupee's recent depreciation against the U.S. dollar has also contributed to a continued stagnation in Pakistan's nominal GDP per capita. We forecast GDP per capita to stabilize just above US$1,400 by fiscal 2025.
Pakistan's security situation has improved moderately over the past 10 years. However, enduring domestic security risks, in combination with occasional tensions with India, and Pakistan's extended land border with Afghanistan, pose challenges to Pakistan's long-term economic outlook. These conditions, along with a shortfall in physical infrastructure, are hindrances against attracting foreign direct investment.