Fitch Confirms Pakistan’s Foreign Currency Long-Term IDR at ‘B-‘ with Stable Outlook

March 01, 2022 (MLN): Fitch Ratings, in its latest report released yesterday, affirmed Pakistan’s long-term foreign currency issuer default (IDR) rating at ‘B-‘ with a stable outlook.

“Pakistan’s rating reflects external vulnerabilities, a narrow tax revenue base and low governance indicator scores, with GDP growth and most public finance measures broadly in line with its peers following a rebasing. of GDP,” the rating agency said.

In addition, recent reforms include measures to improve public finances and amendments to the State Bank of Pakistan (SBP) Act, which could further entrench the policy shift of recent years towards greater independence. central bank and a market-determined exchange rate, thereby strengthening Pakistan’s resilience. to external shocks.

However, the rating agency said a challenging external backdrop of high oil prices and tighter global monetary policy poses risks; while political pressure could blunt the momentum for reforms, especially with the conclusion of the IMF program in September 2022 and elections expected by mid-2023.

The report notes that risks from a widening current account deficit are likely to remain manageable in light of policy tightening, although sustained high oil prices pose clear downside risk. Fitch forecast the deficit to widen to around 4% of GDP in the fiscal year ending June 2022 (FY22), from 0.6% in FY21. Import pressure is expected to ease from 2HFY22, reducing the deficit to 3.0% in FY23, according to the report.

According to the report, remittances are expected to remain high at current levels over the next two years. Good export performance should also continue, but this is starting from a weak base.

The report estimates that foreign exchange reserves, including gold, will remain stable at around $23 billion (3.2 months of current external payments) over the next two years, as debt repayments offset inflows. . This represents approximately $11 billion above 2019 reserve levels. The commitment to a market-determined exchange rate limits downside risks to reserves.

Pakistan faces annual external debt repayments of about $13 billion to $14 billion, including $3.8 billion of cumulative international bond maturities, through FY26. The current account and the accumulation of foreign exchange reserves have been largely financed by debt, although the authorities have diversified their funding sources and extended maturities, he added.

Regarding the budget deficit, Fitch said it will fall further to 5.6% in FY22 and 4.7% in FY23 from 6.1% in FY22. fiscal year 21, thanks to the revenue reforms adopted in the recent supplementary budget and planned for the fiscal year 23 budget. These measures could consolidate public finances. However, high interest payments, which we project at 35.6% of FY22 revenue (median “B”: 11.5%), limit budget flexibility.

On the debt front, the report forecasts that general government debt will decline to around 70% of GDP in FY22, which is the median “B”, from around 72% in FY21, and that it will remain on a downward trend to 62% by FY26. This development is supported by the reduction of the budget deficit and the strong growth of nominal GDP. Pakistan’s debt-to-GDP ratio fell 11.8 percentage points following a GDP rebasing in FY21, from a pre-rebasing level of 83.6%. However, as a revenue share. Fitch reported high debt of 518% in FY22, compared to a “B” median of 320%.

Fitch forecasts Pakistan’s GDP growth of 4.5% in FY22, slowing slightly from 5.6% in FY21 due to strong manufacturing performance and a continued recovery in consumption, as the challenges of the Covid-19 pandemic fade. The slight deceleration in the growth rate reflects base effects and the impact of fiscal and monetary policy tightening, the rating agency said.

However, high inflation poses a downside risk to the macroeconomic outlook, he said, adding that the economy is expected to grow by 5% in FY23 and over the medium term.

In addition, deposits worth Rs187.5 billion were held at post offices, up 31% year on year and 4% month on month, while national savings schemes held Rs3, 7 tn, marking a drop of 7% year-on-year while, on a monthly basis, it remained stable. .

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Published on: 2022-03-01T10:19:58+05:00

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