HONG KONG: Pakistan’s recent policy adjustments and demonstrated access to external financing, as well as its commitment to a market-determined exchange rate, have offset rising external risks from a widening current-account deficit, said Fitch Ratings late on Wednesday.
In a statement, the American credit-rating agency said that keeping in view the ongoing reforms, if sustained, could create positive momentum for the “sovereign’s ‘B-’ rating, which we affirmed in May 2021 with a stable outlook.”
“Increases in global energy prices and a strong domestic recovery from the initial COVID-19 pandemic shock have put additional strains on Pakistan’s external position,” it said. Citing the widening current account deficit (CAD), it mentioned that the current-account deficit in the ongoing fiscal year to June 2022 “is set to be wider than our previous forecast of 2.2 percent.”
The State Bank of Pakistan (SBP) on November 19, 2021, raised its policy rate by a significant 150bp to 8.75 percent, “pointing to rising risks related to the balance of payments and inflation,” the statement read.
The credit rating agency said: “We think external liquidity pressures should be manageable in the near term, despite the wider current-account deficit, given Pakistan’s adequate foreign-exchange reserves and success in accessing financing.”
Official reserve assets nearly doubled to $24.1 billion by the end of September 2021 from $12.6 billion two years ago. However, liquid foreign-exchange reserves have dropped since mid-September, which “we believe may partly reflect debt repayment.”
Fitch highlighted that Pakistan’s near-term financing efforts have been supported by Saudi Arabia, which plans to place $3 billion on deposit with the SBP and provide an additional $1.2 billion oil-financing facility under a one-year support package. Its foreign reserves also received a $2.8 billion boost in August from the IMF’s one-off global allocation of Special Drawing Rights.
“Funding from these sources followed Pakistan’s successful international debt issuance through a $2.5 billion bond in March 2021 and a follow-on $1-billion bond as part of its global medium-term note programme,” the statement read.
“Pakistan aims to tap debt markets more regularly through the scheme, which could reduce the costs of coming to market. The authorities also plan new sukuk issuance in 2021.” Following a staff-level agreement on the sixth review of the country’s Extended Fund Facility (EFF) reached on November 21, “we expect the IMF to release a further $1 billion in funding, provided certain prior actions are met.”
The American agency underlined that sustained reform efforts and commitment to the IMF programme should support access to external financing, “even with global financing conditions potentially becoming more challenging for emerging markets in 2022 as global monetary policy settings grow less accommodative.”
If the government retains its commitment to a market-driven exchange rate, “we believe this would be a useful shock absorber to help contain external risks in the longer term.” In reference to the last review, they stated that at their rating review in May the agency noted that continued implementation of policies sufficient to facilitate the rebuilding of foreign-exchange reserves and easing external financing risks could lead to positive rating action.
“We also argued that positive rating momentum could emerge from improvements in the business environment or fiscal consolidation if sustained over time,” it said, adding that continued adherence to the EFF reform agenda would increase the likelihood of achieving these outcomes, in our view.
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