Moody’s upgrades Pakistan’s credit rating to Caa2, citing improved economic stability

Moody’s Investors Service has upgraded Pakistan’s long-term issuer rating from “Caa3” to “Caa2” with a stable outlook, reflecting a moderate improvement in the country’s macroeconomic conditions and external financial position.

This decision follows a similar move by Fitch Ratings in July, which upgraded Pakistan’s credit rating from “CCC” to “CCC+.”

Moody’s stated that the upgrade is a result of reduced default risks, which are now more consistent with a Caa2 rating.

This improvement is partly due to greater certainty in Pakistan’s external financing, bolstered by the sovereign’s staff-level agreement with the International Monetary Fund (IMF) on 12 July 2024, for a 37-month Extended Fund Facility (EFF) worth $7 billion. The IMF Board is expected to approve the EFF in the coming weeks.

Pakistan’s foreign exchange reserves have nearly doubled since June 2023, although they remain below the levels required to meet its external financing needs. The country continues to rely on timely support from official partners to fully meet its external debt obligations.

Despite the upgrade, Pakistan’s Caa2 rating still reflects very weak debt affordability, which poses a significant risk to debt sustainability. Moody’s expects interest payments to consume about half of the government’s revenue over the next two to three years. The rating also takes into account the country’s weak governance and high political uncertainty.

The stable outlook indicates a balance of risks, with potential for further improvement if the government can reduce its liquidity and external vulnerability risks and achieve better fiscal outcomes, supported by the IMF programme.

Sustained implementation of reforms, particularly those aimed at increasing government revenue, could enhance debt affordability. Timely completion of IMF reviews would enable Pakistan to secure continued financing from official partners, essential for meeting external debt obligations and rebuilding foreign exchange reserves.

The upgrade to Caa2 from Caa3 also applies to the backed foreign currency senior unsecured ratings for The Pakistan Global Sukuk Programme Co Ltd, which Moody’s views as direct obligations of the Government of Pakistan. The outlook for The Pakistan Global Sukuk Programme Co Ltd is positive.

Additionally, Moody’s has raised Pakistan’s local and foreign currency country ceilings to B3 and Caa2 from B3 and Caa1, respectively.

The two-notch gap between the local currency ceiling and the sovereign rating is due to the government’s significant role in the economy, weak institutions, and high political and external vulnerability risks.

The two-notch gap between the foreign currency ceiling and the local currency ceiling reflects limited capital account convertibility and relatively weak policy effectiveness.