ISLAMABAD - Fitch Ratings has affirmed Pakistan's Long-Term Foreign and Local-Currency Issuer Default Ratings (IDRs) at 'B' with stable outlook.
Fitch has recognised that the country's foreign exchange reserves have strengthened, fiscal deficit reduced and significant progress has been made on structural reforms. Fitch acknowledges that the country's economic outlook has brightened and looks promising in the current fiscal year on the back of agricultural recovery and an influx of investments under the China-Pakistan Economic Corridor.
Fitch Ratings Inc. is one of the "Big Three credit rating agencies", the other two being Moody's and Standard & Poor's.
Pakistan's ratings balance broad gains achieved over the International Monetary Fund (IMF) programme against a high public debt/GDP ratio, low scores on the World Bank governance indicators and heightened security risks, according to Fitch.
Pakistan completed a three-year IMF Extended Fund Facility (EFF) in September 2016. The country has entered 12 IMF programmes since 1988, but this is the first programme that it has completed. Under the programme, reserves were strengthened, the fiscal deficit reduced and significant progress was made on structural reform. Pressure related to the 2018 elections could test the government's commitment to maintaining the policy framework set out by the IMF.
The country's economic outlook has brightened since the start of the programme, with annual GDP growth rising to 4.7 percent in the financial year ending June-2016 (FY16), from 3.7 percent in FY13, above the 'B' median of 3.6 percent. Fitch expects growth to strengthen to 5.3 percent in FY17, lifted by a recovery in agricultural output following poor weather conditions in the previous season and an influx of investment linked to the China-Pakistan Economic Corridor (CPEC). We forecast continued strong domestic demand, with private consumption aided by faster credit growth. Remittances have moderated, as over half come from Gulf economies that are adjusting to lower energy prices, but a sharper slowdown is a downside risk.
Inflation slowed to 2.9 percent in FY16, a positive development for a country that has experienced higher and more volatile inflation than the 'B' median. Fitch expects inflation to increase to 4.5 percent in FY17 and 4.8pc in FY18, as commodity prices slowly recover. Inflation is then forecast to remain stable in the medium term. Central bank financing of the fiscal deficit is an upside risk to inflation; government borrowing is shifting back towards the State Bank of Pakistan after moving towards private banks under the IMF programme. The banking sector has performed well, with improvements shown across IMF's Financial Soundness indicators. Non-performing loans remained high at 11.1 percent of total loans at FYE16, though this is down from a peak of 14.8pc at end-June 2013.
However, it noted that Pakistan's public debt/GDP ratio of 64.8 percent at end-FY16 was higher than the 'B' median of 56.7 percent, but Fitch expects the ratio to gradually fall in the medium-term if the country can sustain its progress with fiscal consolidation. The general government budget deficit fell to 4.6 percent of GDP in FY16, from 5.3 percent in FY15, with revenues boosted by structural reforms, including the lowering of the number of tax concessions. Fitch projects the budget deficit to continue narrowing gradually if the economy performs in line with our baseline scenario and the government remains committed to the policy plans set out during the IMF programme.
The accumulation of losses in public sector enterprises (PSE), particularly electricity distribution companies, has in the past lead to injections of funds from the federal government budget to clear debt. Efficiency improvements, higher tariffs and lower energy prices have helped cut PSE losses. However, plans to sustain long-term efficiency gains through privatisation have been delayed due to objections from workers and political opposition. PSE losses could rise considerably if Pakistan suffers an economic shock or there is a sharp rise in energy prices, ultimately feeding through to the government balance sheet.
"We do not expect Pakistan to face external liquidity difficulties in our baseline scenario, but increasing gross external financing needs could increase the country's vulnerability to shifts in investor sentiment. External debt service costs are likely to increase in the medium-term, with USD2.75bn of international bonds maturing between FY17 and FY20. The country will also start paying back the USD6.4bn IMF facility and USD11.7bn of rescheduled Paris Club debt in FY18 and FY17, respectively, albeit over an extended timeframe. Fitch also expects the current account deficit to widen as energy prices start to recover and capital imports increase with higher infrastructure investment, although such investments will be heavily funded by Chinese entities as part of the CPEC. Pakistan demonstrated market access in October 2016 by issuing a USD1bn sukuk at an historically low yield of 5.5 percent," the rating agency noted.
Geopolitical tension and security threats could negatively affect the economic outlook and investor sentiment. Pakistan has had a series of disagreements with India in 2016 over violent incidents along the shared border, marking a turn in relations that had shown tentative signs of improvement in the previous two years. Domestic terrorist incidents remain frequent, particularly in Balochistan province and along the Afghanistan border, although the number of attacks fell in 2016 compared to the previous year, and annual civilian casualties from terrorist activities are at the lowest point since 2006.
Finance Minister Ishaq Dar has welcomed reaffirmation of Pakistan credit rating by Fitch Ratings and stated that it was an acknowledgment of government’s economic policies.
IMRAN ALI KUNDI
