Moody’s Improves Pakistan’s Banking Outlook
Global credit rating agency Moody’s has upgraded Pakistan’s banking outlook from stable to positive, citing improved macroeconomic conditions and resilient financial performance in the sector. This change reflects a better operating environment compared to a year ago.
Key Factors Behind the Upgrade
- Resilient Banking Performance: Pakistani banks have shown strong financial stability despite economic challenges.
- Improved Economic Growth: The economy is expected to expand by 3% in 2025, up from 2.5% in 2024 and -0.2% in 2023.
- Inflation Reduction: Inflation is forecasted to ease significantly to 8% in 2025, compared to an average of 23% in 2024.
- IMF Support: The $7 billion IMF Extended Fund Facility approved in September 2024 provides a steady external financing source, boosting Pakistan’s financial stability.
- Enhanced Government Liquidity: Government positions have improved, strengthening the overall financial landscape.
Banking Sector Trends
- High Exposure to Government Securities: Government securities account for 55% of total banking assets, making banks’ credit strength closely tied to sovereign stability.
- Reduction in Problem Loans: While problem loans rose to 8.4% of total loans in September 2024 (up from 7.6% in 2023), the banking sector remains well-capitalized.
- Declining Interest Margins: Interest rate cuts have reduced policy rates to 12%, which will narrow net interest margins but stimulate private-sector investment.
- Removal of ADR Tax: The removal of the ADR-linked tax for 2025 is expected to lower financing pressure on banks.
Macroeconomic Outlook for Pakistan
- GDP Growth: Expected at 3% in 2025 and 4% in 2026, supported by easing monetary policies and private-sector investment.
- Inflation Control: Expected to drop sharply to 8% in 2025 from 23.4% in 2024.
- Improved Foreign Exchange Reserves: The unlocking of the IMF program has boosted SBP’s FX reserves, reducing external risks.
Challenges and Risks
- Long-Term Debt Sustainability: Pakistan’s high fiscal deficit and debt obligations remain key risks.
- Liquidity and External Vulnerabilities: Despite improvements, external financing risks persist.
- Banking Sector Profitability: Lower interest rates may compress margins, moderating banks’ return on assets to 0.9%-1.0% in 2025.
