Credit rating agency Moody's downgrades Pakistan outlook to 'negative'

Islamabad [Pakistan], June 4 : The New York-based credit rating agency Moody's Investor Service downgraded Pakistan's outlook to negative from stable amid a delay in a deal with the International Monetary Fund (IMF) for an economic bailout.
The agency affirmed the government of Pakistan's B3 local and foreign currency issuer and senior unsecured debt ratings.
"The decision to change the outlook to negative is driven by Pakistan's heightened external vulnerability risk and uncertainty around the sovereign's ability to secure additional external financing to meet its needs," Dawn newspaper reported citing Moody's statement.
It assessed that Pakistan's external vulnerability risk had been amplified by rising inflation, which puts downward pressure on the current account, the currency and already thin foreign exchange reserves, especially in the context of heightened political and social risk.
"Pakistan's weak institutions and governance strength add uncertainty around the future direction of macroeconomic policy, including whether the country will complete the current IMF Extended Fund Facility (EFF) programme and maintain a credible policy path that supports further financing," it said, as per Dawn.
The decision to affirm B3 -- a junk rating -- reflects Moody's assumption that, notwithstanding the downside risks mentioned above, Pakistan will conclude the seventh review under the IMF programme by the second half of this calendar year, and will maintain its engagement with the multilateral lender, leading to additional financing from other bilateral and multilateral partners.
Moody's expected Pakistan's current account to remain under significant pressure on the back of elevated global commodity prices through 2022 and 2023.
Meanwhile, Pakistan's current account deficit widened to USD 13.8 billion during the first 10 months (July to April) of the current fiscal year, compared to a deficit of USD 543 million a year earlier, Dawn reported.
According to data from the IMF, Pakistan's foreign exchange reserves have declined to USD 9.7 billion at the end of April, which can only cover less than two months of imports. This compares with the USD 18.9 billion of reserves at the end of July last year.
Moody's projected the current account deficit to come in at 4.5-5 per cent of GDP for the ongoing fiscal year, slightly wider than the government's expectations.
Moreover, the next elections are due in Pakistan by the middle of 2023. In Moody's view, political parties will find it difficult to continually enact significant revenue-raising measures in the run-up to the elections, especially in a high inflation environment.