Pakistan may face tighter financing conditions: Moody's

TAHIR AMIN

ISLAMABAD: Moody's Investors Service Tuesday said that as market volatility rises due to coronavirus outbreak, sovereigns that rely on foreign-currency borrowing, including Pakistan, may face tighter financing conditions.

Moody's in its latest report stated that the coronavirus outbreak posed increasing risks to the growth outlook for a number of countries in particular in the Asia Pacific, but that the credit profiles of the most-exposed sovereigns remained resilient.

Some sovereigns may also see a disruption to investment flows.

About 130 countries globally, specifically in Central Asia, sub-Saharan Africa and the Asia-Pacific (APAC), are engaged in Belt-and-Road projects with China.

For many of these countries, the projects are a major driver of investment growth.

Interruptions to capital or labour availability, or delays in implementation could hurt growth, if the effects of the virus were prolonged.

Other, second-round effects would come through the financial market channel.

As market volatility rises, sovereigns that rely on foreign-currency borrowing may face tighter financing conditions.

The most exposed are frontier market sovereigns with nearer-term funding needs, such as Mongolia, Pakistan (B3 stable) and Sri Lanka (B2 stable) in APAC, and other frontier markets globally.

A downside scenario of a more prolonged coronavirus outbreak could also disrupt supply chains globally, in particular in Asia.

Some sovereigns could also see delays in Chinese-funded projects, and market financing conditions could tighten.

As measures to contain the coronavirus and fear of contagion-hit consumption and production, downside risks to our GDP growth forecast for China (A1 stable) have increased.

For the rest of the world, the most immediate economic implications will manifest through a fall in tourist arrivals from, and weaker exports of goods to China, and transmission to and through economies integrated into the Chinese supply chain.

"Our baseline assumption is that the economic effects of the outbreak will continue for a number of weeks, after which they will tail off and normal economic activity will resume. The direct impact of the outbreak on growth through multiple channels will centre on APAC and potentially some commodity exporters globally. By contrast, we estimate it will have a muted impact on countries in Europe and the Americas because of their more modest trade and tourism links to China," the report maintained.

As downside risks to China's (A1 stable) growth forecasts increase, there will be reverberations for economies globally, given its role as a very significant source of final demand.

"The most immediate economic implications from the coronavirus outbreak will manifest through a fall in tourist arrivals from, and weaker exports of goods to China and other economies integrated into the Chinese supply chain," Anushka Shah, a Moody's vice president and senior analyst said.

Under such a scenario, Moody's expects GDP growth to fall significantly in Hong Kong (Aa3 stable) and Macao (Aa3 stable) due to their particularly strong trade ties with, and tourism flows from China.

Other economies exposed to a fall in Chinese demand for goods include Taiwan (Aa3 stable), Singapore (Aaa stable), Malaysia (A3 stable) and Korea (Aa2 stable) due to their supply chain linkages.

Globally, commodity producers - mainly in Africa and the Gulf, as well as a few countries in APAC - also have export bases that are exposed to weaker demand from China.

Growth will also soften in other tourism-dependent economies such as the Maldives (B2 negative), Cambodia (B2 stable), Thailand (Baa1 positive) and, to a lesser extent, Vietnam (Ba3 negative).

"However, the buffers available to most sovereigns that are particularly exposed through the trade and tourism channels are also relatively strong, meaning credit-negative implications will be limited," Shah added.

The impact will be muted for countries in Europe and the Americas because of their more modest trade and tourism links.

In a scenario where the outbreak is more prolonged, disruptions to supply chains and a possible extended fall in commodity prices could cause significant second-round economic effects.

In particular, a prolonged fall in prices would hurt commodity-producing sovereigns with already weak credit profiles, such as Zambia (Caa2 negative), Republic of the Congo (Caa2 stable), and Mongolia (B3 stable).