Moody’s Upgrades Pakistan’s credit Rating to Caa1, Outlook Stable

Islamabad – Moody’s Investors Service has upgraded Pakistan’s sovereign credit rating to Caa1 from Caa2, signaling increased confidence in the nation’s economic trajectory. The rating agency also revised the outlook to stable from positive, reflecting a balanced view of Pakistan’s improving, yet still vulnerable, economic position.

Key Drivers Behind the Upgrade

The upgrade reflects Moody’s assessment of Pakistan’s improved external position and liquidity situation. A recent staff report from the International Monetary Fund (IMF) played a significant role, demonstrating progress under the Stand-By Arrangement.

“The upgrade to Caa1 is driven by Moody’s assessment of a material improvement in Pakistan’s liquidity and external position, supported by the recent conclusion of the first review under the Stand-By Arrangement (SBA) with the IMF,” Moody’s stated. “The SBA has unlocked significant external financing, reducing the risk of default on Pakistan’s external obligations.”

However, the agency cautioned that risks remain. “The Caa1 rating reflects the very high degree of economic and political risk, and the weak fiscal strength of Pakistan. While the current liquidity position is improved,it remains vulnerable to shocks. Furthermore, the debt service burden and external profile could be more rapid than we currently expect. On the downside, there remains risks of delays in reform implementation required to secure timely official financing, which would in turn weaken Pakistan’s external position again,” it noted.

Sukuk Program and Country Ceilings Also Adjusted

The upgrade extends to the backed foreign currency senior unsecured ratings for the Pakistan Global Sukuk Programme Co Ltd, which also moved to Caa1 with a stable outlook.Moody’s also raised Pakistan’s local and foreign currency country ceilings to B2 and Caa1, respectively, from B3 and Caa2. The agency explained the two-notch gap between the local currency ceiling and sovereign rating is “driven by the goverment’s relatively large footprint in the economy, weak institutions, and high political and external vulnerability risk”.

Government Response and future Outlook

finance Minister Muhammad Aurangzeb has been actively engaging with rating agencies to advocate for a rating improvement. He urged Moody’s in July to improve Pakistan’s credit rating during a virtual engagement.

Speaking in Islamabad today, Aurangzeb highlighted the positive reception of Pakistan’s economic reforms by international financial institutions and expressed optimism that Moody’s decision would soon be mirrored by other agencies. He also noted there was “room for lowering interest rate by year-end,” signaling a potential easing of monetary policy as economic stability improves.

Pakistan has largely avoided issuing international bonds since July 2021, citing unfavorable macroeconomic conditions and its credit rating. Instead, the country has relied on deposits from pleasant nations to manage external liabilities.

Recent Rating History

Moody’s previously upgraded Pakistan’s local and foreign currency issuer and senior unsecured debt ratings to Caa2 from Caa3 on August 28, 2023, citing improving macroeconomic conditions and changing the outlook to positive. Prior to that, in late february 2024, following the general elections, Moody’s retained Pakistan’s long-term credit rating at Caa3, citing “political risks” following a contested election.

More to follow.