The New York-based agency said the downgrading of the rating from ‘B’ to ‘B-’ reflected heightened external financing risk from low reserves and elevated external debt repayments, as well as continued deterioration in the fiscal position, with a rising debt-to-GDP ratio. It said that a successful conclusion of the ongoing negotiations on IMF support could help stabilise external finances, but the programme would then face significant implementation risk.
Pakistan’s liquid reserves have continued to fall, reaching $7.3 billion as of Dec 6 — equivalent to 1.5 months of imports — despite significant stabilisation efforts by the State Bank of Pakistan and the new PTI government.
Fitch Ratings cites high debt repayment obligations, low forex reserves and fragile fiscal situation as reasons
The rating agency projected high gross financing needs, with an expected narrowing of the current account deficit offset by higher external debt service payments relative to last year. Sovereign debt service obligations over the next three years amount to $7-9bn per year, including a $1bn Eurobond repayment due in April next year. “External debt servicing will stay high throughout the next decade, with CPEC-related outflows set to begin in the early 2020s,” according to Fitch.
The agency has noted 425 basis points hike in interest rate during 2018 and 24 per cent currency depreciation since December 2017 and forecast current account deficit to narrow to 5.1pc of GDP in the fiscal year ending June 2019 and to 4pc in FY20, from a revised 6.1pc in FY18. Rupee depreciation, lower oil prices and newly imposed import duties will drive a deceleration in imports, while exports are likely to strengthen gradually. However, this may not be sufficient to rebuild reserve buffers sustainably.
Fitch estimates that in the absence of an IMF programme, liquid foreign exchange reserves will continue to fall to $7bn by the end of the current fiscal year.
It said Pakistan’s debt-to-GDP ratio rose to 72.5pc in last fiscal year ending June 2018 from about 67pc a year before due to rupee depreciation and widening fiscal deficit. Fitch forecast the debt ratio to rise further to 75.6pc of GDP in current fiscal year on additional rupee depreciation.
Fitch forecast fiscal deficit to narrow to 5.6 of GDP this year, higher than 5.1pc targeted by the PTI government in supplementary budget but much lower than 6.6pc last fiscal year.
The rating agency has noted with concern accumulation of PSE’s losses as contingent liability, particularly power sector circular debt worth almost 3pc of GDP. It forecast GDP growth to fall to 4.2pc this fiscal year, from a 13-year high of 5.8pc last fiscal year, as monetary and fiscal tightening measures begin to weigh on activity. However, this remains above the current ‘B’ category median GDP growth of 3.5pc.
Reduced infrastructure capacity constraints, particularly in the energy sector, following CPEC investments, along with improved national security, could support growth in the medium term.
Fitch projected the inflation rate to rise to 7pc from 3.9pc last fiscal year.