The outlook on the long-term rating remains stable. Standard & Poor’s also affirmed its ‘B-’ issue rating on Pakistan’s senior unsecured foreign- and local-currency debt and its ‘B-’ transfer and convertibility assessment.
At the same time, it raised the short-term sovereign credit rating to ‘B’ from ‘C’, following a change in criteria that links long-term ratings with short-term ones. Earlier Moody downgraded the rating of Pakistan’s sovereign credit rating from B3 to Caa1.
The sovereign ratings on Pakistan take into account the country’s weak fiscal profile and associated high public and external leverage, low income level, as well as the underlying weak political and policy setting. These constraints are balanced against strong remittance inflows that help sustain a still-adequate external liquidity position.
Pakistan’s high public and external indebtedness is a main rating constraint. Net general government debt stands at an estimated 52% of GDP in 2012, 40% of which is external debt.
“The interest burden on this debt poses a great constraint on discretionary spending, given already sparse fiscal resources,” said Standard & Poor’s credit analyst Agost Benard. “The large interest bill and other expenditure-side rigidities against a narrow revenue base of about 12.5% of GDP result in ongoing fiscal slippages.”
The country’s political and security environments also constitute a rating constraint. A volatile, fragmented, and adversarial domestic political setting detracts from policymaking and implementation. The resulting weak macroeconomic conditions, together with regional insurgencies, sectarian strife, and weak governance standards are a significant deterrent for private sector investment.
The government’s recent failure to make timely payments on unrated government-guaranteed commercial obligations by the Central Power Purchasing Agency to independent power producers was attributable to bureaucratic delays and does not constitute a default according to our criteria.
“Our ‘B’ rating category considers the potential of administrative weaknesses to result in payment delays from ministries to agencies,” Mr. Benard said.
The ratings on Pakistan are supported by the country’s adequate foreign currency liquidity. Buoyant remittance inflows from a geographically well-diversified off-shore labor force and large Pakistani diaspora amount to 5.6% of GDP, having risen more than threefold in nominal terms over the past seven years.
The raising of the short-term rating reflects our criteria revision regarding the link between long-term and short-term sovereign credit ratings. According to our revised criteria, the short-term rating on a sovereign government is derived directly and solely from the long-term rating. As a result, the raising of the short-term rating does not reflect an improvement in Pakistan’s short-term creditworthiness.
The stable rating outlook balances still-adequate external liquidity against vulnerabilities posed by structural fiscal weaknesses and significant political and security risks.
We may lower the ratings if major slippages in policy occur, resulting in rising public debt, or if the balance-of-payments position deteriorates and external liquidity comes under greater stress.
Conversely, we may raise the ratings if Pakistan shows progress in its fiscal consolidation efforts, manifested in moderating deficits and a steady reduction in the public debt burden.