Moody’s Investors Service has maintained Pakistan’s ratings at ‘Caa3’ with a stable outlook but has raised concerns about significantly high risks of liquidity and external vulnerability following contentious elections, limiting the decision-making capacity of the potential coalition government.
The international rating agency noted that the political risks are elevated after the controversial general elections held on February 8, 2024. While a coalition government seems likely, there is uncertainty regarding its willingness and ability to quickly negotiate a new IMF program after the current one expires in April.
Moody’s emphasized that until a new program is agreed upon, Pakistan’s ability to secure loans from other partners will be severely constrained. The country’s credit profile reflects very high liquidity and external vulnerability risks, with foreign exchange reserves well below the necessary levels to meet its external financing needs.
Additionally, the weak fiscal strength and heightened political risks further constrain its credit profile. The agency acknowledged Pakistan’s large economy and moderate growth potential as factors contributing to its moderate economic strength.
The report highlighted that while Pakistan is expected to meet its external debt obligations for the fiscal year ending June 2024, there is limited visibility on how the country will finance its very high external financing needs after the current IMF Stand-By Arrangement concludes in April.
Moody’s ratings for Pakistan encompass ‘baa3’ for economic strength, ‘b3’ for institutions and governance strength, ‘ca’ for fiscal strength, and ‘caa’ for susceptibility to event risk. The stable outlook reflects Moody’s assessment that the challenges faced by Pakistan are consistent with a ‘Caa3’ rating level, with broadly balanced risks. Continued IMF engagement is seen as crucial to secure additional financing from other partners, potentially reducing default risk.
