Moody’s assigns B3 ratings to Pakistan’s dollar bonds

ISLAMABAD: Rating agency Moody’s on Thursday assigned B3 ratings to Pakistan’s dollar-denominated bonds, citing the country’s robust long-term growth potential as it concluded the first ever three-tranche capital market transaction to raise foreign debt for budgetary purposes.

Moody’s Investors Service assigned a foreign currency senior unsecured program rating of (P)B3 to the country’s global medium-term note program, and B3 ratings to the senior unsecured, dollar- denominated notes issued under the program with maturities of 5, 10 and 30 years.

The country is returning to the Eurobond market after a break of 3.5 years to raise $2.5 billion with the issue settlement date likely to be April 8.

Moody’s ratings mirror Pakistan’s long-term issuer rating of B3.

“Pakistan’s B3 rating is underpinned by the country’s robust long-term growth potential, a relatively large but low-income economy, and a stable banking sector,” it said in a statement. “Ongoing reforms and institutional enhancements also raise policy credibility and effectiveness, although from a low base.”

Ratings could be upgraded if ongoing fiscal reforms are to expand the government’s revenue base, raise debt affordability, and lower its debt burden with further reduction in external vulnerability risks.

However, ratings could be downgraded if external position deteriorates, government’s debt burden continues to rise and there is a rising probability of private sector participation in the G-20 debt service suspension initiative.

Moody’s expects economic activity in Pakistan to continue to rebound over the next two years as the country recovers from the coronavirus shock.

“Supply-side improvements, including through projects under the China-Pakistan Economic Corridor, coupled with improvements in domestic security and trade policy, will also help spur long-term investments, with the potential to revitalise the economy’s industrial base over time,” it said.

However, Moody’s said balanced against the credit strengths are the government’s narrow revenue base that weakens debt affordability, the country’s still material structural constraints to economic and export competitiveness and still low, although rising, foreign exchange reserve adequacy, and long-term political risks.

In particular, while revenue as a share of GDP grew in fiscal 2020, it remains low and continues to limit fiscal flexibility in the face of shocks and the ability of the government to reduce its debt burden. Moody’s expects fiscal reforms, including under the International Monetary Fund program and projects with other development partners, to mitigate risks related to debt sustainability and government liquidity.

Moody’s further said Pakistan exposes to environmental and social risks and weak governance profile. Relatively weak institutions constrain the government’s capacity to address environmental, social and governance risks.

“The exposure to environmental risk is highly negative because of Pakistan’s vulnerability to climate change and the limited supply of clean, fresh and safe water. With varied climates across the nation, Pakistan is significantly exposed to extreme weather events, including tropical cyclones, drought, floods and extreme temperatures. In particular, the magnitude and dispersion of seasonal monsoon rainfall influence the agricultural sector growth and rural household consumption,” it said. “The exposure to social risk is highly negative, driven primarily by safety concerns that have limited investment and diversification opportunities. Still very low incomes as well as the limited access to quality healthcare, basic services, housing and education, especially in rural areas, are also important social issues.”

Moody’s said the influence of governance is highly negative. International surveys of various indicators of governance, while showing some early signs of improvement, continue to point to weak rule of law and…