Pakistan to offer higher interest rates to investors to make up for its vulnerabilities
The Standard and Poor’s (S&P) has lowered Pakistan credit rating by a notch to B- as its economy slows down, decreasing growth prospects, and stress on an already ballooning trade loss and budget deficit increases.
This simply means that when Pakistan goes to foreign investors to raise capital through Eurobond or Sukuk bond, it will have to offer even higher interest rates to the investors to make up for the vulnerabilities.
Previously, our country credit rating was B. After this downward revision, we now stand six steps below the AAA ratings or an investment grade. An investor grade means the country has an extremely strong capacity to meet its financial obligations (read loan repayments) whereas the B- ratings mean the country is more vulnerable to business, financial and economic conditions even though it currently has the capacity to meet its financial commitments.
International credit rating agencies such as S&P and Moody’s give countries ratings after assessing their economic conditions. Investors take these ratings seriously while investing in other countries.
S&P says fiscal and external imbalances will remain high. That is the government’s budget deficit, which is more than Rs2 trillion, will remain wide as spending remains much higher than revenues. Similarly, imports will remain higher than exports, resulting in a higher trade loss, which will keep our foreign exchange reserves and local currency under pressure.
S&P says that delay in finalising a loan programme with the International Monetary Fund (IMF) shows the economic reforms will be slower than anticipated. However, it maintains that Pakistan’s economic outlook is ‘stable’. This reflects the agency’s expectations that the country will secure sufficient funding to meet its external obligation over the next 12 months.
Pakistan’s economy has slowed down and GDP growth forecast has been revised to 4% as opposed to 6.2% previously targeted. This is because the central bank has shifted its stance to achieving economic stability and cut spending that were resulting in higher imports.
On January 31, the State Bank of Pakistan raised interest rates to 10.25%, its highest level in five years, to further tighten the economic growth, saying challenges to our economy will persist as current account deficit remains high, the fiscal deficit has elevated and the core inflation has been persistently high. “This situation calls for continued consolidation efforts,” the SBP said.
Last December, Fitch also downgraded Pakistan’s long-term rating to B- from B saying the country’s foreign exchange reserves were very low to meet its growing foreign obligations (imports and loan repayment). Moody’s also warned that measures taken by the government in its mini-budget may support exports but will end up increasing the government’s budget deficit for much longer.
Pakistan needed $12 billion for the year ending June 30, 2019 while it had only $7 billion until a week ago. The PTI government has been able to take care of its external finance needs for the current financial year because of the premier’s successful visits to Saudi Arabia and UAE last year. Riyadh has deposited $3 billion in the SBP’s account to support our dollar reserves while UAE has also dispatched $1 billion last week, which will be followed by another $2 billion soon. There are reports that the Chinese government has also agreed to provide at least $1 billion.