Moody’s upgrades Pakistan’s rating to Caa2; changes outlook to positive

Global rating agency Moody’s on Wednesday upgraded Pakistan’s local and foreign currency issuer and senior unsecured debt ratings to Caa2 from Caa3.

The international rating agency — one of the top three global rating firms — said its decision to upgrade was due to “Pakistan’s improving macroeconomic conditions and moderately better government liquidity and external positions, from very weak levels”.

“Accordingly, Pakistan’s default risk has reduced to a level consistent with a Caa2 rating,” it said in a note, adding that there was now “greater certainty” on the country’s sources of external financing following the staff-level agreement with the International Monetary Fund (IMF) in July for an extended fund facility (EFF) of $7 billion.

In February, Moody’s rating agency had retained Pakistan’s long-term credit rating at Caa3, which indicated a higher probability of default and a greater degree of investment risks amid weak debt affordability.

The rating agency said it expected the Fund to approve the EFF in the next few weeks, noting that the country’s foreign reserves had doubled since June 2023. However, it noted that they still remained “below what is required to meet its external financing needs”.

As for the outlook, the agency said, “The positive outlook reflects a balance of risks skewed to the upside.

“It captures the possibility that the government is able to further lower its government liquidity and external vulnerability risks, and achieve a better fiscal position than we currently expect, supported by the IMF programme,” it said.

Furthermore, it added that “sustained reform implementation, including revenue-raising measures, can increase the government revenue base and improve Pakistan’s debt affordability”.

However, it cautioned that there remained an “uncertainty around the government’s ability to sustain reform implementation”.

“The positive outlook reflects a balance of risks skewed to the upside. It captures the possibility that the government further reduces its government liquidity and external vulnerability risks, and achieves a better fiscal position than we currently expect,” it highlighted, adding that reforms could stabilise the economy.

Moreover, it stated that Saudi Arabia and the United Arab Emirates “have collectively pledged to invest $15 billion in Pakistan, which if realised, would significantly bolster Pakistan’s foreign exchange reserves”.

Moreover, it added that the rating would likely be upgraded if the country’s liquidity and external vulnerability risks decreased, which would come from a “record of completing IMF reviews in a timely manner that indicates the government’s ability to sustain reform implementations”.

However, it cautioned that the rating would like be downgraded if there were an increase in external vulnerability risks.

“An increase in social and political risks that disrupted policymaking and undermined Pakistan’s ability to secure financing would also be credit negative,” it said.