ISLAMABAD - Moody's Investors Service has upgraded Pakistan’s outlook from ‘under review for downgrade’ to ‘stable’, while maintaining a B3 rating.

The credit rating agency, Moody's, has confirmed Pakistan's B3 local and foreign currency issuer and senior unsecured debt ratings with a stable outlook. Concurrently, Moody's has also confirmed the B3 foreign currency senior unsecured ratings for the Third Pakistan International Sukuk Co Ltd. The associated payment obligations are, in Moody's view, the direct obligations of the government of Pakistan.

The review for downgrade reflected Moody's assessment that the country's participation in the G20 Debt Service Suspension Initiative (DSSI) raised the risk that private sector creditors would incur losses. In the last few weeks, Moody's has considered the evidence of implementation of DSSI for a range of rated sovereigns, and statements by G20 officials. While Moody's continues to believe that the ongoing implementation of DSSI poses risks to private creditors, the decision to conclude the review and confirm the rating reflects Moody's assessment that, at this stage, for Pakistan, those risks are adequately reflected in the current B3 rating.

The stable outlook reflects Moody's view that the pressures Pakistan faces in the wake of the coronavirus shock and prospects for its credit metrics in general are likely to remain consistent with the current rating level. In particular, while Moody's sees downside risks to Pakistan's economy because of movement and activity restrictions related to the pandemic, which would in turn intensify the government's fiscal challenges, strong support from development partners including for external financing, coupled with effective macroeconomic policies started ahead of the crisis, contain external vulnerability and liquidity risks.

Pakistan's Ba3 local currency bond and deposit ceilings remain unchanged. The B2 foreign currency bond ceiling and the Caa1 foreign currency deposit ceiling are also unchanged. The short-term foreign currency bond and deposit ceilings remain unchanged at Not-Prime. These ceilings act as a cap on the ratings that can be assigned to the obligations of other entities domiciled in the country.

Moody's expects Pakistan's economic growth to be positive in fiscal year 20-21 (ending June 2021) from a recession in fiscal 2020, but still low at around 1-2%. While Pakistan's economy is relatively closed with low reliance on exports, movement restrictions due to coronavirus will keep economic activity below the pre-outbreak levels for some time.

The slow economic recovery will in turn weigh on government revenue, keeping the fiscal deficit wide at around 8-8.5% of GDP in fiscal 2021 under Moody's projections, at similar levels compared to fiscal 2020, and leaving the government's debt burden high at around 90% of GDP by the end of fiscal 2021.

Risks to the economy and government finances are to the downside, particularly if more stringent measures are implemented to curb the spread of the virus domestically.

However, even in downside economic and fiscal scenarios, Moody's expects Pakistan to cover its external financing needs with continued significant financial support from its development partners, including the commitment to rollover most bilateral loans that come due, independent of how DSSI is implemented.