Moody’s assigns (P)Caa1 rating to Pakistan’s global bond offering

Moody’s assigns (P)Caa1 rating to Pakistan’s global bond offering

Singapore, April 01, 2014 — Moody’s Investors Service has assigned a provisional rating of (P)Caa1 to the Government of Pakistan’s announced bond offering. The outlook is negative.

RATINGS RATIONALE

Pakistan’s Caa1 government bond rating reflects the country’s moderate economic strength. Although the scale of the economy is relatively large, per-capita income is very low; and growth rates have been constrained by power-supply infrastructure bottlenecks. Our assessment of Pakistan’s very low institutional strength incorporates political instability and factious relations between the executive, military and judicial branches of government that have historically hampered policy effectiveness.

Fiscal metrics are weak intrinsically and relative to ratings peers. A narrow tax base, low savings and shallow capital markets hinder stable domestic financing of sizable budget deficits, which was 8.0% of GDP in fiscal 2013. However, government debt rollover risk is reduced by sizeable recourse to domestic bank lending and, to some degree, by a debt structure which consists of long tenor credits from multilateral and official bilateral creditors.

 

The challenging operating environment, susceptibility to economic risks and political shocks, coupled with a high concentration to the sovereign, links the health of the banking system very closely to that of the government. Banks are well-managed but remain vulnerable to cyclical economic risks and to political shocks.

 

The negative outlook reflects the implications of large debt repayments due to the International Monetary Fund (IMF) from a previously suspended loan program. Given Pakistan’s low external liquidity buffer, this is a strain on reserves, leaving a very slim cushion for dealing with worsening current or financial account developments. However, Pakistan’s new IMF program — a $6.8 billion Extended Fund Facility (EFF) signed in September 2013 — will help to ease external debt payment pressures.

 

An important prerequisite to the stabilization of Pakistan’s credit profile is successful completion of the IMF program, which has started to gain traction as is seen in the IMF Board’s approval of the second review in March 2014.

 

GDP per capita (PPP basis, US$): 3,056 (2012 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3.6% (2013 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 5.9% (2013 Actual)

Gen. Gov. Financial Balance/GDP: -7.7% (2013 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -1.1% (2013 Actual) (also known as External Balance)

External debt/GDP: 25.2% (2013 Actual)

Level of economic development: Very Low level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

 

The principal methodology used in this rating was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

 

The weighting of all rating factors is described in the methodology used in this rating action, if applicable.

 

REGULATORY DISCLOSURES

 

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

 

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

 

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.