Moody’s Investors Service has revised the outlook on Pakistan’s foreign currency government bond rating to ‘stable’ from negative amid stabilisation in country’s external liquidity position.

Moody’s Investors Service is a leading provider of credit ratings, research, and risk analysis. The rating is affirmed at Caa1. Concurrently, Moody’s has affirmed the government’s issuer rating and senior unsecured rating at Caa1. Pakistan’s country ceilings remain unchanged. The long-term, local-currency bond and deposit country ceiling is affirmed at B1, while the long-term foreign currency bond and deposit ceilings are affirmed at B3 and Caa2 respectively.

It further noted that continued implementation of structural reforms under the IMF programme would ensure additional tranche disbursements, further buffering Pakistan’s foreign reserves.

Despite a weak track record with previous programmes, Pakistan is making steady progress in meeting reform benchmarks under the current, 36-month $6.8 billion Extended Fund Facility with the IMF, which it signed in September 2013. So far, Pakistan has cleared three programme reviews, most recently at the end of June, and received $2.2 billion of financial assistance. The government has met 10 of 17 structural benchmarks, and appears to be on track towards achieving the remainder. Broadly, these goals include tax and energy sector reforms, as well as efforts to privatize state-owned enterprises. Reform implementation may be challenging. Nonetheless, we think the authorities will persevere to achieve the overall intent of the package.

A key factor behind Moody’s one-notch downgrade and outlook revision for Pakistan in July 2012 was deterioration in the external liquidity position, due to a widening current-account deficit, large outflows from the financial account and a decline in international reserves to very low levels. This situation has reversed over the past year: the current-account deficit is modest, estimated at 1.0% of GDP for the fiscal year ended June 2014, while financial inflows have increased due to a $2 billion Eurobond sale earlier this year, privatization proceeds, and multilateral and bilateral funding. Importantly, repayments to the IMF from the previously suspended programme are tapering off, even as disbursements from the ongoing program continue.

As a result, foreign reserves have risen, from a low of $2.9 billion in early February 2014 to $9.0 billion by the end of June 2014. A fall in Moody’s External Vulnerability Indicator — which gauges the adequacy of reserves with respect to maturing external debt obligations over the next year — to below the 100% threshold for the fiscal year ending June 2015 reflects the easing external pressures.

Moody further noted upward triggers to the rating would stem from the successful completion of the IMF programme, further improvements in the external liquidity position, continued fiscal consolidation, and progress on structural reforms which would remove infrastructure impediments and supply-side bottlenecks — eventually aiding a shift to a higher growth trajectory. Domestic political stability and steady relations with international donors would further support the rating. Conversely, a stalling of the ongoing IMF programme, deterioration in the external payments position or a worsening political environment would be viewed as credit negative, noted the Moody’s Investors Service.

Meanwhile, Finance Minister Senator Ishaq Dar appreciated and welcomed revision of Pakistan’s foreign currency government bonds rating from negative to stable by Moody’s Investors Service. “As a result of hard work, commitment and financial discipline introduced by the government that the world has changed its outlook towards Pakistan’ he added.

He said that with the over subscription of Euro Bond, successful auction of 3G/4G Spectrum, divestment of GOP shares, tax and energy sector reforms and improved economic indicators, the international confidence in Pakistan has increased to a level where we can build stronger economic base. He said that in line with the vision of the PML(N) leadership we have an agenda to make Pakistan a vibrant and developed country.