New York October 7 2022: Yields of Pakistan bonds and Sukuks floating in the international market rise sharply as Moody’s downgraded Pakistan’s rating to Caa1.
Yields (YTM) of Pakistan International Sukuk having maturity of 5th December increases 25.2% to 140.1% and Pakistan International Bond having maturity of 15th April 2024 increases 2.9% to 77.6%.
Pakistan Government International Bonds with maturity of 30th September 2025, 8th April 2026 and 5th December 2027 are trading at 50.0%, 39.9% and 32.9%, according to data available at Bloomberg.
Moody’s Investors Service (“Moody’s”) has downgraded the Government of Pakistan’s local and foreign currency issuer and senior unsecured debt ratings to Caa1 from B3. Moody’s has also downgraded the rating for the senior unsecured MTN programme to (P)Caa1 from (P)B3. The outlook remains negative.
The negative outlook signals that a rating upgrade is unlikely over the near term. The outlook would likely be changed to stable if Pakistan’s government liquidity and external vulnerability risks decreased materially and durably. This could come from access to material external financing that significantly raised foreign exchange reserves. A resumption of fiscal consolidation, including through implementing revenue-raising measures, pointing to a meaningful improvement in debt affordability would also be credit positive.
The decision to downgrade the ratings to Caa1 is driven by increased government liquidity and external vulnerability risks and higher debt sustainability risks, in the aftermath of devastating floods that hit the country since June 2022. The floods have exacerbated Pakistan’s liquidity and external credit weaknesses and vastly increase social spending needs, while government revenue is severely hit. Debt affordability, a long-standing credit weakness for Pakistan, will remain extremely weak for the foreseeable future. The Caa1 rating reflects Moody’s view that Pakistan will remain highly reliant on financing from multilateral partners and other official sector creditors to meet its debt payments, in the absence of access to market financing at affordable costs. In particular, Moody’s expects that Pakistan’s IMF Extended Fund Facility (EFF) program will remain in place and provide an avenue for financing from the IMF and other multilateral and bilateral partners in the near term.
The negative outlook captures risks around Pakistan’s ability to secure required financing to fully meet its needs in the next few years. Elevated social and political risks compound the government’s difficulty in implementing reforms, including revenue-raising measures, that would improve the country’s fiscal position and alleviate liquidity stresses. The floods will also raise Pakistan’s external financing needs, raising the risks of a balance of payments crisis. Pakistan’s weak institutions and governance strength adds uncertainty around whether the country will maintain a credible policy path that supports further financing. The negative outlook also captures risks that, should a debt restructuring be needed, it may extend to private sector creditors.
