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.
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.
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