S&P maintains Pakistan’s rating with stable outlook amid dependence on foreign aid

Standard & Poor’s (S&P) maintained Pakistan’s credit rating at ‘CCC+’ with a stable outlook for the current fiscal year, emphasising the country’s heavy reliance on foreign aid, high inflation, and political instability.

The New York-based rating agency cited Pakistan’s dependency on foreign assistance to meet debt obligations as a significant concern. 

“S&P Global Ratings affirmed its ‘CCC+’ long-term sovereign credit rating and ‘C’ short-term rating on Pakistan. The outlook on the long-term rating is stable,” the agency stated.

This development came after the Fitch Ratings upgraded Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC+’ from ‘CCC’ on Monday. 

S&P highlighted ongoing political uncertainty and its impact on economic reforms. The agency noted that the government’s ability to implement necessary reforms under the IMF program without major social unrest would influence policy effectiveness in the coming months. It pointed out that political turmoil since the ouster of former Prime Minister Imran Khan had hindered reform efforts and damaged sovereign credit metrics.

“The stable outlook balances the risks to Pakistan’s external liquidity position and fiscal performance over the next 12 months against the prospect of continued support from multilateral and bilateral partners,” S&P added.

The country struck a $7-billion bailout deal with the IMF earlier this month to stabilise its economy after getting on the brink of a sovereign default last year.

While official aid has bolstered Pakistan’s foreign exchange reserves, the country remains dependent on sustained support and credit rollovers to maintain its external buffers, which remain low. 

“Hefty debt-servicing costs continue to exert pressure on the government’s fiscal position amid high inflation, tight monetary conditions, and elevated political uncertainties that may affect the efficacy of policymaking,” the agency warned.

Pakistan is also negotiating with Saudi Arabia, the United Arab Emirates and China to get a $12 billion rollover which is essential to close the IMF deal. 

S&P indicated that it could lower Pakistan’s ratings if external indicators worsen rapidly or fiscal deficits widen beyond the domestic banking system’s financing capacity, potentially undermining the government’s ability to service its commercial debt. 

“One potential indication of domestic financing stress would be further increases in the government’s interest burden, which we estimate will exceed 45% of government revenues over the next few years,” the agency said.

Conversely, the rating firm suggested that Pakistan’s ratings could improve if there are significant enhancements in external and fiscal positions. 

“Signs of improvement could include a sustained rise in foreign exchange reserves, as well as a reduction in Pakistan’s debt-service costs relative to revenues and a lengthening of debt maturities,” S&P concluded.