Long-term outlook stable for Pakistan – Fitch

Fitch Ratings has affirmed Pakistan’s long-term foreign- and local-currency Issuer Default Ratings (IDRs) at ‘B’ with stable outlooks, said a statement issued by the ratings agency on Monday.

The issue ratings on Pakistan’s senior unsecured foreign- and local-currency bonds, country ceiling as well as the short-term local- and foreign-currency IDRs and are also affirmed at ‘B’.

The issue ratings on the third Pakistan International Sukuk Company Limited’s foreign-currency global certificates have also been affirmed at ‘B’. The company was incorporated primarily for the purpose of facilitating sukuk transactions and is wholly owned by Pakistan.

Fitch expects economic growth to strengthen to 5.3 per cent in 2016-17, lifted by a recovery in agricultural output following poor weather conditions in the previous season and an influx of investment linked to the China-Pakistan Economic Corridor (CPEC).

“We forecast continued strong domestic demand, with private consumption aided by faster credit growth,” said the agency.

Pakistan’s ratings balance broad gains achieved over the Inter­national Monetary Fund (IMF) programme against a high public debt/GDP ratio, low scores on the World Bank governance indicators and heightened security risks, it added.

Pakistan completed a three-year IMF Extended Fund Facility (EFF) in September 2016. The country has entered 12 IMF programmes since 1988, but this is the first programme that it has completed. Under the programme, reserves were strengthened, the fiscal deficit reduced and significant progress was made on structural reform.

“Pressure related to the 2018 elections could test the government’s commitment to maintaining the policy framework set out by the IMF,” said the rating agency.

Fitch said the country’s economic outlook has brightened since the start of the programme, with annual GDP growth rising to 4.7pc in the financial year ending June 2016, from 3.7pc in 2012-13, above the ‘B’ median of 3.6pc.

Fitch expects inflation to increase to 4.5pc in 2016-17 and 4.8pc in 2017-18, as commodity prices slowly recover. Inflation is then forecast to remain stable in the medium term.

Pakistan’s public debt/GDP ratio of 64.8pc at the end of 2015-16 was higher than the ‘B’ median of 56.7pc, but Fitch expects the ratio to gradually fall in the medium-term if the country can sustain its progress with fiscal consolidation.

Fitch projects the budget deficit to continue narrowing gradually if the economy performs in line with its baseline scenario and the government remains committed to the policy plans set out during the IMF programme.

“We do not expect Pakistan to face external liquidity difficulties in our baseline scenario, but increasing gross external financing needs could increase the country’s vulnerability to shifts in investor sentiment,” it said.

External debt service costs are likely to increase in the medium-term, with $2.75 billion of international bonds maturing between 2016-17 and 2019-20. The country will also start paying back the $6.4bn IMF facility and $11.7bn of rescheduled Paris Club debt in 2017-18 and 2016-17, respectively, albeit over an extended timeframe.

Fitch also expects the current account deficit to widen as energy prices start to recover and capital imports increase with higher infrastructure investment, although such investments will be heavily funded by Chinese entities as part of the CPEC.