Pakistan credit rating under review on debt relief concerns, says Moody's.

Byline: Shahid Iqbal

KARACHI -- Moody's has placed Pakistan's long-term B3 ratings on review for downgrade as it expects the country to request bilateral debt service relief from G-20 creditors under the recently-announced initiative causing losses to private sector creditors.

Moody's on Thursday said that suspension of debt service obligations to official creditors would be unlikely to have rating implications but the G-20 has called on private sector creditors to participate in the initiative on comparable terms.

The agency will assess whether Pakistan's participation in the initiative would likely entail default on private sector debt. The country has not indicated interest in extending the debt service relief request to the private sector.

Any losses expected to arise from that participation would be consistent with a lower rating, the agency said in a press release.

The rapid spread of coronavirus, sharp deterioration in global economic outlook, and significant reduction in risk appetite are creating a severe economic and financial shock, it added.

'For Pakistan, the current shock transmits mainly through a sharp slowdown in economic activity, lower tax revenue as economic activity slows, and higher government financing needs relative to pre-coronavirus levels,' said the agency.

Moody's expects Pakistan's economy to contract by around one per cent in the current fiscal year, and to grow by 2-3pc in FY21 - below potential. The economic slowdown will weigh on government revenue and modestly raise spending, in turn pushing the fiscal deficit wider to 10pc of GDP.

Suspension of repayments to private creditors could trigger downgrade

As a result, Moody's projects the government's debt burden to reach around 85-90pc of GDP by June.

However, the government's commitment to fiscal reforms, including under its 2019-22 International Monetary Fund programme, provides a crucial anchor for the continued expansion of its revenue base when economic activity gradually normalises. Overall, Moody's expects that the debt burden will return to a downward trend after the initial shock.

The macroeconomic adjustments that have occurred over the past 18-24 months have also reduced external vulnerability risks in the face of a potentially significant shock.

Moody's projects the current account deficit to be relatively narrow, around 2pc of GDP in this and the next fiscal year, as lower...