ISLAMABAD: Moody's Investors Service (Moody's) has assigned a foreign currency senior unsecured programme rating of (P)B3 to the government of Pakistan's global medium-term note programme, as well as B3 ratings to the senior unsecured, US dollar denominated notes issued under the programme with maturities of 5-, 10- and 30-year.
The payment obligations associated with the notes representing drawdowns from the programme are direct, unsecured obligations of the government of Pakistan and rank pari passu with all its other unsecured and unsubordinated obligations. Pakistan intends to use the net proceeds from each issuance for general budgetary purposes, it added.
Moody’s further stated that Pakistan's B3 rating is underpinned by the country's robust long-term growth potential, a relatively large but low-income economy, and a stable banking sector. Ongoing reforms and institutional enhancements also raise policy credibility and effectiveness, although from a low base.
Moody's expects economic activity in Pakistan to continue to rebound over the next two years as the country recovers from the coronavirus shock. Supply-side improvements, including through projects under the China-Pakistan Economic Corridor (CPEC), coupled with improvements in domestic security and trade policy, will also help spur long-term investments, with the potential to revitalise the economy's industrial base over time.
Balanced against these credit strengths are the government's narrow revenue base that weakens debt affordability, the country's still material structural constraints to economic and export competitiveness and still low, although rising, foreign exchange reserve adequacy, and long-term political risks.
In particular, while revenue as a share of GDP grew in fiscal 2020 (ending June 2020), it remains low and continues to limit fiscal flexibility in the face of shocks and the ability of the government to reduce its debt burden. That said, Moody's expects fiscal reforms, including under the country's International Monetary Fund (IMF) programme and projects with other development partners, to mitigate risks related to debt sustainability and government liquidity.
Pakistan's ESG Credit Impact Score is highly negative (CIS-4), reflecting its high exposure to environmental and social risks, as well as its weak governance profile. Relatively weak institutions constrain the government's capacity to address ESG risks.
The exposure to environmental risk is highly negative (E-4 issuer profile score) because of Pakistan's vulnerability to climate change and the limited supply of clean, fresh and safe water. With varied climates across the nation, Pakistan is significantly exposed to extreme weather events, including tropical cyclones, drought, floods and extreme temperatures. In particular, the magnitude and dispersion of seasonal monsoon rainfall influence the agricultural sector growth and rural household consumption. The agricultural sector accounts for around 20 percent of GDP and exports, and nearly 40 percent of total employment. Overall, around 70 percent of the entire population lives in rural areas. As a result, both droughts and floods can create economic, fiscal and social costs for the sovereign.
The exposure to social risk is highly negative (S-4 issuer profile score), driven primarily by safety concerns that have limited investment and diversification opportunities. Still very low incomes as well as the limited access to quality healthcare, basic services, housing and education, especially in rural areas, are also important social issues. That said, the government is focused on reducing poverty and inequality, strengthening social safety nets, and promoting human capital as key priorities through its expansive "Ehsaas" programme, although effects will take time to materialise and are limited by still weak institutions and governance.
The influence of governance is highly negative (G-4 issuer profile score).