ISLAMABAD: The international ratings agency, Fitch has downgraded Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC-‘, from ‘CCC+’.
An Issuer Default Rating (IDR) is an assessment of an issuer’s relative vulnerability to default on financial obligations, and is intended to be comparable across industry groups and countries. Issuers often carry both long-term and short-term IDRs. In this particular case, Pakistan’s likelihood to default on its long-term foreign currency obligations, has been deemed more plausible than before. Ratings don’t typically change the chances of default. Rather, they are forward-looking opinions on the relative ability of an entity or obligation to meet financial commitments.
The ratings agency has not given an outlook like usual. Typically, Fitch gives an outlook of the entities that it rates, be it “stable” or “positive” or “negative”. However, the agency clarified in its statement that below the CCC+ rating, the agency does not give outlooks.
According to Fitch, the key drivers in the fall of Pakistan’s rating were a number of factors that can be linked to the current financial crisis. The agency states that even while assuming a successful conclusion to the 9th review of the IMF program, the country’s forex outlook is bound to worsen, considering the coming elections and subsequent policy instability. Under such circumstances, either default or a restructuring of debts is highly likely. It is important to note, that if the staff level agreement is not reached on the IMF program, the current position of Fitch would be considered an overstatement, about the country’s ability to fulfil its obligations.
The ratings agency also points towards Pakistan’s falling CAD figures that have been maintained due to the restrictions. The agency fears that the figures are bound to rise once the economy opens up under the strict IMF conditions. As per Fitch, “(Pakistan’s) External public-debt maturities in the remainder of the fiscal year ending June 2023 (FY23) amount to over $7 billion and will remain high in FY24”. Under these circumstances, the country’s already under pressure reserves are very likely to crumble without external aid.
It is important to note that CCC- is one of the most dangerous categories for a sovereign entity. Typically, countries don’t see the light of the R’D or the D category but entities that do, do so after they have entered bankruptcy filings.
