(The following statement was released by the rating agency)
Aug 21 -
Summary analysis -- Pakistan (Islamic Republic of) ---------------- 21-Aug-2012
CREDIT RATING: B-/Stable/B Country: Pakistan
Primary SIC: Sovereign
Mult. CUSIP6: 464367
Mult. CUSIP6: 695847
Credit Rating History:
Local currency Foreign currency
20-Jul-2012 B-/B B-/B
24-Aug-2009 B-/C B-/C
19-Dec-2008 CCC+/C CCC+/C
14-Nov-2008 CCC+/C CCC/C
06-Oct-2008 B-/C CCC+/C
15-May-2008 BB-/B B/B
The sovereign credit ratings on the Islamic Republic of Pakistan take into account the country’s weak fiscal profile and associated high public and external leverage, low income level, as well as the underlying weak political and policy setting. These constraints are balanced against strong remittance inflows that help sustain a still-adequate external liquidity position.
Pakistan’s public and external indebtedness is a main rating constraint. Net general government debt stands at an estimated 52% of GDP in 2012. 40% of such debt is external. Although we expect the debt-to-GDP ratio to decline to about 48% by 2015, that modest improvement will stem from high nominal GDP growth, which will in turn be propelled by double-digit inflation. The interest burden on this debt is a hefty 27% of general government revenues. This poses a great constraint on discretionary spending, given already sparse fiscal resources. The large interest bill and other expenditure-side rigidities against a narrow revenue base of about 12.5% of GDP result in ongoing fiscal slippages.
Pakistan’s inability to implement structural revenue reforms and meet agreed fiscal targets resulted in the suspension of the International Monetary Fund (IMF) loan agreement well before its expiry in September 2011--diminishing Pakistan’s access to foreign funding. The weak revenue performance also directly constrains monetary policy effectiveness because the government is compelled to borrow from the central bank for deficit financing. As of May 2012, the central bank’s net claims on the general government amounted to 73.3% of the monetary base, up from 54% in September 2011.
Pakistan’s political and security environments also constrain the rating. A volatile, fragmented, and adversarial domestic political setting detracts from policymaking and implementation. The resulting weak macroeconomic conditions, together with regional insurgencies, sectarian strife, and weak governance standards are a significant deterrent for private sector investment.
The government’s recent failure to make timely payments on unrated government-guaranteed commercial obligations by the Central Power Purchasing Agency to independent power producers was attributable to bureaucratic delays and does not constitute a default according to our criteria. Our ‘B’ rating category considers the potential of administrative weaknesses to result in payment delays from ministries to agencies.
Pakistan’s low income level is an additional rating constraint. With per capita GDP of an estimated US$1,282 in fiscal 2012, the government has a low revenue base to draw on. The government’s political and policy flexibility needed to avoid default is also severely limited. Structural reforms necessary to break the low-growth, high-inflation pattern that emerged over the past five years need a more stable political environment and will take time to accomplish. We therefore believe this rating constraint will persist for some time to come.
Pakistan’s adequate foreign currency liquidity supports the ratings. Buoyant remittance inflows from a geographically well-diversified off-shore labor force and large Pakistani diaspora amount to 5.6% of GDP, having risen more than threefold in nominal terms over the past seven years. These inflows help moderate the effect of a negative terms-of-trade shift, such that current account deficits are likely to remain at a moderate 2.0%-2.5% range. Foreign exchange reserves of US$14.9 billion (as of July 6, 2012) are still within prudential norms, covering an estimated 3.1 months of current account payments. For the forecast period to 2015, we expect reserve coverage to decline further, leaving gross external financing needs as a percentage of current account receipts plus usable reserves at about 108%--still comparable with that of peers in the rating category. The deterioration may slow on lower oil prices and higher service receipts from the recent reopening of North Atlantic Treaty Organization supply routes to Afghanistan, and, with that, the likely resumption of Coalition Fund support payments from the U.S.
The stable rating outlook balances still-adequate external liquidity against vulnerabilities posed by structural fiscal weaknesses and significant political and security risks.
We may lower the ratings if major slippages in policy occur, resulting in rising public debt ratios, or if the balance-of-payments position deteriorates and external liquidity comes under greater stress. Conversely, we may raise the ratings if Pakistan shows progress in its fiscal consolidation efforts, manifested in moderating deficits and a steady reduction in the public debt burden.
Related Criteria And Research
-- Methodology: Short-Term/Long-Term Ratings Linkage Criteria For Corporate And Sovereign Issuers, May 15, 2012
-- Sovereign Government Rating Methodology And Assumptions, June 30, 2011