Credit agency Fitch downgrades Pakistan to CCC+ from B-

Islamabad [Pakistan], October 21 : Fitch Ratings on Friday downgraded Pakistan's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'CCC+' from 'B-' amid country's political volatility and deteriorating economy.
Downgrade of Pakistan's rating reflects further deterioration in external liquidity and funding conditions, reported Geo News.
According to its statement, the company does not typically assign outlooks to sovereign nations with a rating of 'CCC+' or below.
The agency flagged worsening liquidity and policy risks as the main reasons that led to a downgrade, reported Geo News.
"The downgrade reflects further deterioration in Pakistan's external liquidity and funding conditions, and the decline of foreign exchange reserves," Fitch Ratings said.
"This is partly a result of widespread floods, which will undermine Pakistan's efforts to rein in twin fiscal and current account deficits."
The down-rating "also reflects our view of increased risks of policies potentially undermining Pakistan's International Monetary Fund (IMF) programme and official financial support."
On foreign exchange reserves, it said the State Bank of Pakistan (SBP) had about USD 7.6 billion till October 14, which can cover about a month of current external payments, reported Geo News.
It also noted that forex reserves had tumbled from over USD 20 billion at the end of August 2021.
"Falling reserves reflect large, albeit, declining current account deficits (CADs), external debt servicing and earlier foreign exchange interventions by the SBP," the credit rating agency said.
Before stabilising in the week of October 14, reserves had been falling every week since the disbursement of USD 1.2 billion from the IMF in the week of September 2, upon the completion of the seventh and eighth reviews of Pakistan's Extended Fund Facility (EFF), the rating agency said.
Talking to Geo News, Dr Khaqan Najeeb, a former adviser to the finance ministry, said considering Pakistan's liquidity crisis, policy risks, and especially the reserves position, which stood at about $7.6 billion on October 14, Fitch adjusted Pakistan's rating to 'CCC+' form 'B-.'
"It also reflects the fact that Pakistan has raised the issue of debt restructuring, while continued uncertainty in the country also has an impact when these agencies look at the credit ratings [of a country'," Dr Najeeb said.
"Once must remember that ongoing balance of payments challenge has worsened due to the floods, affecting the fiscal situation as well, as more money is needed to help rebuild and restructure."
"Though the Fitch Rating, being a negative, was largely expected after Moody's downgrade to Pakistan," Dr Najeeb said adding, "This also highlights the fact that Pakistan must continue to use IMF as an anchor in these difficult times to ride through fiscal year 2023."
Pakistan's external public debt maturities in FY23 are over USD 21 billion, mostly to bilateral and multilateral creditors, which mitigates rollover risks, and there are already agreements to roll over some of these, reported Geo News.
Quoting authorities, Fitch placed estimated flood damage at USD10 billion-30 billion, but reconstruction costs are likely to be lower, as is the impact on Pakistan's twin deficits.
Meanwhile, former prime minister Imran Khan, who was ousted in a no-confidence vote on 10 April, continues to put political pressure on the government, organising protests across the country calling for early elections, reported Geo News.
Khan was however disqualified by the Election Commission of Pakistan from running for or holding a public office after a tribunal of the commission found him guilty of selling foreign dignitaries' gifts in the market.
Khan's PTI party won by-elections in the key Punjab province in July, defeating the incumbent PML-N, and PTI won more national and provincial seats in by-elections on 17 October.
Regular elections are due in October 2023, creating the risk of policy slippage after the conclusion of the IMF programme due in June.