Fitch downgrades Pakistan’s rating from stable to negative

Fitch Ratings has downgraded Pakistan’s outlook from stable to negative. Photo: AFP/FILE

In the wake of deteriorating liquidity and limited external funding since the beginning of this year, Fitch Ratings on Monday downgraded Pakistan’s outlook from stable to negative, while reaffirming its long-term foreign exchange (LTFC) issuer default rating (IDR) at ‘B’. . ,

The revision of the negative outlook reflects a significant deterioration in Pakistan’s external liquidity position and financing position since the beginning of 2022, Fitch Ratings said in a statement.

“We consider the IMF Board’s approval of Pakistan’s new staff-level agreement with the IMF, but see considerable risks to its implementation and continue to access financing after the program’s end in June 2023 in a difficult economic and political environment. are,” read the statement.

The International Credit Rating Agency said renewed political instability could not be ruled out and could undermine executives’ financial and external adjustments, as was the case in 2022 and early 2018, especially with slower growth and higher In the current inflationary environment.

political uncertainty

Fitch said in its report that former prime minister Imran Khan, who was removed in a no-confidence motion on April 10, is calling for early elections in the country and holding of mass protests and public meetings.

However, the new government is supported by an unequal coalition of parties with only a small majority in parliament. Regular elections are due in October 2023, posing a risk of policy slippage following the conclusion of the IMF programme.

falling stock

Citing yet another reason for downgrading Pakistan’s rating, Fitch said limited external funding and large current account deficit have drained foreign exchange reserves, as the State Bank of Pakistan (SBP) slowed the depreciation of the currency. To use the store.

It said liquid net foreign exchange reserves in SBP declined to around $10 billion as of June 2022, or more than a month of current outward payments, from about $16 billion a year ago.

external deficit

“We estimate CAD to reach $17 billion (4.6% of GDP) in the fiscal year ending June 2022 (FY22), driven by rising global oil prices and strong private consumption in non-oil,” Fitch said. was driven by an increase in imports.”

Fiscal tightening, higher interest rates, measures to limit energy consumption and imports lower our forecast of limiting the current account deficit to US$10 billion (2.6% of GDP) in fiscal year 2013, read the statement.

The rating agency said they estimated the fiscal deficit to be 7.5% of GDP (about Rs 5 trillion) in FY12, up from 6.1% in FY2011. Tax cuts and subsidies on fuel and electricity account for most of the fiscal fall; These were introduced by the previous government in February and lasted till June.

It added that they expect the deficit to narrow to 5.6% of GDP in FY13 (about Rs 4.6 trillion or US$22 billion), driven by moderation as well as expanded taxation, That includes higher corporate and personal income taxes and growth. Petroleum Levy. Our forecast of fiscal deficit is about 1% of GDP above the government target.

high inflation

Fitch said consumer price inflation averaged 12.2% in FY12, but rose to 21.3% year-on-year (6.3% mom) in June due to hikes in petrol and electricity prices. SBP projected inflation at 18%-20% in FY13, as it raised its policy rate from 125bp to 15% in its most recent action on 7 July. SBP’s latest action took the cumulative rate increase to 800bp in this latest tightening cycle.

It added that the forecast for average inflation of 19% in FY23 and 8% in FY24 largely reflects base effects, but broad-based inflation from recent and future energy price hikes. and this means that inflation is sloping upwards.