KARACHI: Global credit rating agency Fitch Ratings on Monday affirmed Pakistan’s long term foreign currency rating at B- with a stable outlook, saying the country has taken positive steps on fiscal front as well as measures to strengthen external finance
“Progress is being made towards strengthening external finances and positive steps have been made on the fiscal front, but considerable risks remain,” the New York-based rating agency said.
Fitch said external vulnerabilities have been reduced over the past year as a result of policy actions and financing unlocked through an International Monetary Fund (IMF) programme, which have narrowed the current account deficit and supported a modest rebuilding of reserves.
“Still, external finances remain fragile with relatively low foreign-exchange reserves in the context of an elevated external debt repayment schedule and subdued export performance,” it noted.
The IMF’s Extended Fund Facility is on track, with the first review completed in December. However, implementation risks remain high in Fitch’s view, particularly given the politically challenging nature of the authorities’ reform agenda.
Fitch forecasts a further narrowing of the current account deficit to 2.1 per cent of GDP in the year ending June 2020 (FY20) and 1.9 per cent in FY21, from 4.9 per cent in the last fiscal year.
It held import compression as the driver narrowing deficit, facilitated by rupee depreciation of around 30 per cent since December 2017 and tighter monetary conditions. Exports were forecast to grow modestly from a low base.
The State Bank of Pakistan’s (SBP) adoption of a more flexible exchange rate last May and capital inflows were also supporting a rebuilding of foreign-exchange reserves. Fitch expects gross liquid foreign-exchange reserves to rise to around $11.5 billion by FYE20, from $7.2 billion at FYE19.
“We expect continued adherence to the new exchange rate regime to help rebuild foreign-exchange reserves and improve external resilience,” Fitch said. “Public finances are a key credit weakness and deteriorated further in FY19 prior to the approval of the IMF programme,” it noted.
The agency said gross external financing needs of the country would likely remain high, in the mid-$20 billion range, over the medium-term due to considerable debt repayments and despite smaller current account deficit.
Fitch said government debt rose to 84.8 per cent of GDP, well above the current ‘B’ median of 54 per cent, due to currency depreciation. Debt/revenue also jumped sharply to 667 per cent, compared with the historic ‘B’ median of 252 per cent.
The government was consolidating public finances, but Fitch believes progress would be challenging due to the relatively high reliance on revenues to achieve the planned adjustment.