Recently, Fitch ratings demoted Pakistan’s long-term foreign-currency issuer default rating (IDR) to ‘CCC-’, from ‘CCC+’ and assigned no outlook as it “typically does not assign outlooks to ratings of ‘CCC+’ or below”.
“Default or debt restructuring is an increasingly real possibility, in our view,” it stated.
“The downgrade reflects further sharp deterioration in external liquidity and funding conditions, and the decline of foreign-exchange (FX) reserves to critically low levels.”
“While we assume a successful conclusion of the 9th review of Pakistan’s International Monetary Fund (IMF) programme, the downgrade also reflects large risks to continued programme performance and funding, including in the run-up to this year’s elections. Default or debt restructuring is an increasingly real possibility, in our view.”
“Liquid net forex reserves of the State Bank of Pakistan were about $2.9 billion on 3 February 2023, or less than three weeks of imports, down from a peak of more than $20 billion at end-August 2021,” it added.
“Falling reserves reflect large, albeit declining, current account deficits (CADs), external debt servicing and earlier forex intervention by the central bank, particularly in 4Q22, when an informal exchange-rate cap appears to have been in place.”
During the reminder of FY23, the firm expected reserves to stay at low levels though it forecasted a modest recovery as to anticipated inflows and the recent removal of the exchange rate cap.
However, the external public-debt maturities in the remainder of the June FY23 with over $7 billion and will increase in FY24, Fitch said.