It was good to see that when National Assembly was still discussing the pros and cons of the annual budget for the year 2015-16, Moody’s Investor Service upgraded Pakistan’s sovereign credit rating from Caa1 to B3 besides improving the rating assigned to the US dollar Trust Certificates issued by the Second Pakistan International Sukuk Company Ltd. to B3. Moody’s assessment also changed Pakistan’s foreign currency bond ceiling to B2 from B3, foreign currency deposit ceiling to Caa1 from Caa2 and the local currency country risk ceiling to Ba3 from B1. However, short-term currency ceilings for foreign currency bonds and deposits remained unchanged at Not-Prime (NP).
Giving the reasons for a changed outlook, Moody’s staff identified a number of improvements in various areas of the economy. It said that as Pakistan’s external liquidity position continues to strengthen, it is now less vulnerable to foreign developments as net foreign exchange reserves of the country have steadily climbed to dollar 11.9 billion as of end-May, 2015, from a low of dollar 3.2 billion at the close of January, 2014. Moody’s also expected a real GDP growth rate of 4.7 percent during the fiscal year ending June, 2016. Additionally, lower oil prices in the international market have relieved pressure on the current account of balance of payments. The report also notes that upward pressures stem from support from multilateral and bilateral lenders, which have bolstered an improving foreign reserve position and supported an ongoing reform progress. However, Moody’s has warned that despite positive developments, rating constraints which could put downward pressures stem from Pakistan’s very low fiscal strength due to its debt levels in the light of a narrow revenue base. Further, deeply entrenched weaknesses in the power sector could also act as an impediment to growth.
The improvement in Pakistan’s rating on foreign currency denominated debt is certainly a welcome development but the reasons given for the country’s upgrade are largely exogenous and cannot be considered of lasting nature. As is obvious the change in outlook was basically prompted by exogenous factors such as a huge drop in oil prices and sympathetic attitude of the international community. Any unfavourable tilt in their behaviour, for whatever reasons, could undermine Pakistan’s position once again. On the domestic level, law and order situation has to be improved, saving rate of the economy has to be raised substantially and confidence of entrepreneurs has to be regained. On paper, such deficiencies or challenges may appear to be simple but gigantic efforts have to be made to earn the respect of foreign investors and place the economy on an upward trajectory. Investment grade rating is a reflection of a country’s own economic performance which has to be earned through hard work and making the necessary sacrifices. It needs to be remembered that Pakistan’s rating was still below the investment grade and several more upgrades would be needed to attract investment on a large-scale in order to improve the economy’s fundamentals.
The text appeared as Editorial of Business Recorder today.