Moody’s Investors Service downgraded Pakistan’s sovereign credit rating on Thursday by one notch to Caa1 from B3, citing increased government liquidity and external vulnerability risks, following the rain-induced devastating floods that hit the country earlier this year.
The floods, caused by abnormal monsoon rains and glacial melt, have submerged huge swathes of the country and killed nearly 1,700 people, most of them women and children.
The floods will also raise Pakistan’s external financing needs, raising the risks of a balance of payments crisis, according to the rating agency.
Moody’s outlook on Pakistan remained unchanged at negative.
The floods have exacerbated Pakistan’s liquidity and external credit weaknesses and vastly increase social spending needs, while government revenue is severely hit.
“Debt affordability, a long-standing credit weakness for Pakistan, will remain extremely weak for the foreseeable future. The Caa1 rating reflects Moody’s view that Pakistan will remain highly reliant on financing from multilateral partners and other official sector creditors to meet its debt payments, in the absence of access to market financing at affordable costs,” the rating agency said in a statement.
Moody’s expects that Pakistan’s IMF Extended Fund Facility (EFF) programme will remain in place and provide an avenue for financing from the IMF and other multilateral and bilateral partners in the near term.
“The negative outlook captures risks around Pakistan’s ability to secure required financing to fully meet its needs in the next few years. Elevated social and political risks compound the government’s difficulty in implementing reforms, including revenue-raising measures, that would improve the country’s fiscal position and alleviate liquidity stresses.”
It said the floods will also raise Pakistan’s external financing needs, raising the risks of a balance of payments crisis. The rating agency said Pakistan’s weak institutions and governance strength added uncertainty around whether the country will maintain a credible policy path that supports further financing. “The negative outlook also captures risks that, should a debt restructuring be needed, it may extend to private sector creditors.”
“The Caa1 rating also applies to the backed foreign currency senior unsecured ratings for The Third Pakistan International Sukuk Co Ltd and The Pakistan Global Sukuk Programme Co Ltd. The associated payment obligations are, in Moody’s view, direct obligations of the Government of Pakistan.”