Moody’s Investors Service has revised the outlook on Pakistan’s foreign currency government bond rating to stable from negative. Pakistan had a negative rating since 2012 due to a deterioration in the external liquidity position, a widening current-account deficit and large outflows, and a decline in international reserves. This situation has reversed in the last year and we need to understand what this means. Business and economy keep getting small shocks from a plethora of causes, from terrorism to oil prices. A rating is an opinion of the general creditworthiness of the country. Lower credit ratings result in higher borrowing costs because the borrower is deemed to carry a higher risk of default. Even the US had a negative rating in 2011.
The rating is not about the general investment climate but about the value of our currency. And this is something to have a small celebration over. The language of financial analysis is often confusing so here’s an attempt to simplify. The rating has improved due to successful completion of the IMF benchmarks that has caused an inflow of money into Pakistan. Out payments to the IMF are tapering off and giving more room for fiscal consolidation. Steady relations with international donors supports the rating. The remittance economy is also a boon for Pakistan and helps keep numbers up.
The rating agencies may well be a source of organic fertilizer for Pakistan, but that does not mean that Pakistan can actually pay its debt. It is hoped that the finance ministry remembers that a lot of this improvement is due to borrowing from international markets by issuing bonds and from the IMF. The boots in reserves might be temporary, so they must capitalize on the current stability to draw investment and improve local infrastructure for it. The rating means nothing for us if there is no real investment and growth, and sadly with the energy situation there might not be any.