The Moody’s Investors Service on Wednesday upgraded Pakistan’s sovereign credit rating from Caa3 to Caa2, citing “improving macroeconomic conditions.”
The international ratings agency said the upgrade was driven by improving macroeconomic conditions and “moderately better government liquidity and external positions” from the very weak levels that had pushed it to Caa2 in March 2023. “Accordingly, Pakistan’s default risk has reduced to a level consistent with a Caa2 rating,” it said, adding the staff-level agreement inked between the government and the International Monetary Fund (IMF) had boosted “certainty” on the country’s sources of external financing.
Pakistan’s previous Caa3 rating had indicated a higher probability of default and a greater degree of investment risks amid weak debt affordability. According to Moody’s, it expected the IMF to approve the $7 billion Extended Fund Facility in a few weeks, adding Pakistan’s foreign reserves had doubled since June 2023. However, it warned, they still remained below the levels required to “meet its external financing needs.”
It also upgraded Pakistan’s outlook from “stable” to “positive,” saying it reflected a “balance of risks skewed to the upside.” This, it said, included the possibility that the government would further lower its government liquidity and external vulnerability risks, and “achieve a better fiscal position than we currently expect, supported by the IMF program.” It said Pakistan’s revenue and debt affordability could further improve through “sustained reform implementation, including revenue-raising measures.”
However, it noted, risks remained over the government’s ability to sustain the implementation of reforms. “We expect interest payments to continue absorbing about half of government revenue over the two to three years,” it said.
Additionally, said Moody’s, Saudi Arabia and the United Arab Emirates had “collectively pledged to invest $15 billion in Pakistan, which if realized, would significantly bolster Pakistan’s foreign exchange reserves.” If the liquidity and external vulnerability risks continue to decrease, it said, the rating could be upgraded further. However, it warned, the rating could be downgraded if external vulnerability risks increased. “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.
“Concurrent to today’s action, we have also raised Pakistan’s local and foreign currency country ceilings to B3 and Caa2 from Caa1 and Caa3, respectively,” it said, explaining the gap between the local currency ceiling and sovereign rating was driven by the government’s relatively large footprint in the economy, weak institutions, and high political and external vulnerability risk.
Welcome development
According to state-run PTV, Prime Minister Shehbaz Sharif has expressed his satisfaction with the rating upgrade and attributed it to the hard work of the incumbent government’s economic team.
Chairing a meeting to review economic development and investment strategies, the prime minister reiterated that his previous government had averted default by prioritizing the nation over political interests. He maintained that the country had now achieved stability and was on the path to progress and development.
Claiming the Moody’s upgrade was an “international endorsement” of the government’s economic policies, he hoped the economy would maintain its positive trajectory and continue to advance.