Fitch downgrades Pakistan’s issuer default ratings from ‘B-‘ to ‘CCC+’

Fitch Ratings on Friday downgraded Pakistan’s long-term foreign currency Issuer Default Rating (IDR) to ‘CCC+’ from ‘B-‘, citing deterioration in the country’s external liquidity and funding conditions.

The rating agency stated that one of the key factors behind the decision is the decline of foreign exchange reserves due to devastating floods in the country.

“This is partly a result of widespread floods, which will undermine Pakistan’s efforts to rein in twin fiscal and current account deficits. The downgrade also reflects our view of increased risks of policies potentially undermining Pakistan’s IMF programme and official financial support,” the statement said.

The agency further cited the under-pressure reserves of the country.

According to Fitch ratings, the liquid net foreign exchange reserves of the State Bank of Pakistan (SBP) were down from more than US $20 billion at end-August 2021 to about US $7.6 billion by October 14, 2022.

Fitch downgrades Pakistan’s outlook from stable to negative

“Falling reserves reflect large, albeit, declining current account deficits (CADs), external debt servicing and earlier FX interventions by the SBP,” added the statement.

“Before stabilising in the week to 14 October, reserves had been falling every week since the disbursement of USD1.2 billion from the IMF in the week to 2 September, upon the completion of the 7th and 8th reviews of Pakistan’s Extended Fund Facility (EFF).”

The agency further noted that driven by soaring oil prices and higher non-oil imports on strong private consumption, the country’s current account deficit (CAD) reached US $17 billion (4.6% of GDP) during the fiscal year.

“Fiscal tightening, higher interest rates and measures to limit energy consumption and imports underpin our forecast for the CAD to narrow to US $10 billion (2.7% of GDP) in FY23, despite the hit to export revenue and import needs after the recent floods,” the agency said.

It further added that lower imports and commodity prices helped to narrow the CAD in recent months, to about US $300 million in September.

Citing the country’s large funding needs, the rating agency said that Pakistan’s external public debt maturities in FY23 are over US $21 billion which mitigates rollover risks.

“The authorities estimate the flood damage at US $10 billion-30 billion, but reconstruction costs are likely to be lower, as is the impact on Pakistan’s twin deficits,” stated Fitch.

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.