Moody’s Report Flags Financial Risks for Pakistan

Moody’s, the international rating agency, has released a report on Pakistan’s economy, expressing concerns over its financial stability despite maintaining a stable outlook.

The report underscores the country’s high financial needs and insufficient foreign exchange reserves, posing significant challenges in the short to medium term.

According to Moody’s, the recent general election on February 8 has heightened political risks, raising uncertainties about the new government’s ability to swiftly negotiate a new loan program with the IMF.

The agency warns that the lack of a strong electoral mandate for necessary reforms could hinder Pakistan’s access to loans from other countries and institutions.

While Moody’s acknowledges the potential for Pakistan’s rating to improve if financial and external risks decrease, it also highlights the risk of a downgrade in the event of debt default. The agency maintains a ‘Caa3’ rating for Pakistan, indicating high credit risk, with a stable outlook.

Moody’s expresses doubts about the new government’s capacity to negotiate a new IMF program following the expiration of the current one in April. The agency points to the likelihood of a weak coalition government forming at the center, potentially hampering reform efforts.

The report highlights the importance of continued IMF engagement and the urgent need for external financing to mitigate default risks and address very high external financing needs. Moody’s suggests that a sustainable increase in foreign exchange reserves and fiscal consolidation could positively impact Pakistan’s credit rating in the future.

In response to the report, Bank of America (BofA) has raised its recommendation for Pakistan dollar bonds, citing reduced political uncertainty post-elections and the potential for rating improvements. Despite lingering political risks, BofA anticipates positive market sentiment driven by progress with the new IMF program and gradual rating improvements.