Fitch Ratings on Tuesday assigned Pakistan’s proposed U.S. dollar-denominated bond a ‘B-’ rating, with a recovery rating of ‘RR4’, indicating average recovery prospects for investors in the event of a default.
Pakistan plans to use the proceeds from the proposed bond for general budgetary and sovereign financing purposes, Fitch said. It said the rating aligned with Pakistan’s Long-Term Foreign-Currency Issuer Default Rating, which also stands at ‘B-’ with a stable outlook.
The agency said the ‘RR4’ recovery rating reflects its expectation of average recovery prospects in a default scenario. The proposed bond’s rating would remain sensitive to changes in Pakistan’s Long-Term Foreign-Currency Issuer Default Rating, with the sovereign’s external and fiscal positions among the key factors that could influence future rating actions.
Fitch said renewed deterioration to Pakistan’s external liquidity could lead to a downgrade, adding risks could emerge from persistently high oil prices or a sharp decline in remittance inflows. A slowdown or reversal in fiscal consolidation could also put downward pressure on the rating if it leads to a material increase in government debt and worsens debt-servicing indicators.
Conversely, Fitch said Pakistan could see a positive rating action if external financing risks ease significantly, including through a stronger ability to secure external funding and a sustained increase in foreign-currency reserves beyond the agency’s forecasts.
A substantial reduction in government debt and debt-servicing burdens could also support an upgrade, particularly if fiscal consolidation is implemented in line with commitments under the International Monetary Fund program and results in structural improvements in tax revenue generation, it said.
The ratings agency also highlighted governance-related environmental, social and governance factors as key rating drivers for the proposed bond. Pakistan has an ESG Relevance Score of ‘5’ for political stability and rights, as well as for the rule of law, institutional and regulatory quality, and control of corruption, Fitch said. The scores reflect the significant weight given to World Bank Governance Indicators in Fitch’s proprietary Sovereign Rating Model. Pakistan ranks in the 18th percentile on those governance indicators, according to Fitch.
The proposed issuance comes as Pakistan continues to rely on a combination of multilateral support, bilateral financing and international capital markets to meet its external financing requirements and strengthen its fiscal and foreign-exchange position. The ‘B-’ rating places the proposed bond in the highly speculative category, underscoring continued risks surrounding Pakistan’s external liquidity, debt-servicing obligations and fiscal consolidation efforts.