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October 31 , 2017

Standard & Poor’s maintains Pakistan’s rating

ISLAMABAD: Just ahead of unveiling Islamabad’s plan to raise $2 to $3 billion through launching of two international bonds within a short span of next two weeks, Standard & Poor’s (S&P) Global Ratings affirmed its 'B' long-term and short-term sovereign credit ratings on the Islamic Republic of Pakistan.

The S&P maintained Pakistan’s ratings on Monday, helping Islamabad to materialise its plan to generate much desired dollar inflows through Sukuk and Eurobond in order to avert balance of payment crisis and stop depletion of foreign currency reserves.

“The S&P maintained our ratings which is good news for Pakistan’s economy. It is reply to all those who are presenting doomsday scenario,” Federal Secretary Finance Shahid Mehmood said in a brief chat while talking to The News here on Monday.

According to the statement issued on Monday, S&P Global Ratings affirmed its 'B' long-term and short-term sovereign credit ratings on the Islamic Republic of Pakistan. The outlook for the long-term ratings remains stable. We also affirmed the 'B' long-term issue ratings on senior unsecured debt and Sukuk trust certificates.

Institutional and economic profile: Political changes are unlikely to lead to economic turbulence. We believe the 2018 general elections will have a limited impact on the policy

environment. The very low income level remains a rating weakness. Inadequate infrastructure and security risks continue to act as structural impediments to foreign direct investments.

We expect the 2018 general elections to have a limited impact on the macroeconomic environment. Notwithstanding the outcome, we expect government policies to remain broadly unchanged. Former prime minister Nawaz Sharif was removed from office in July 2017 after a Supreme Court battle with opponents who accused his family of hiding their assets overseas. Minister for Petroleum and Natural Resources, Shahid Khaqan Abbasi, was elected as prime minister by the National Assembly until general elections are held in June 2018. We expect the Pakistan Muslim League (PML) government to hold back on new policy-making until at least the 2018 elections, the statement said.

OUTLOOK: The stable outlook reflects our expectations that Pakistan's external and fiscal metrics will not worsen materially from their current levels. We believe the country's economic prospects remain favourable. We may raise our ratings on Pakistan if the country's security environment settles to an extent that economic growth continues to trend higher, strengthening the country's fiscal and external positions.

Conversely, we may lower our ratings if the current infrastructure investments do not yield any positive impact on macroeconomic stability. Indications of this would include GDP growth below our forecast, or external or fiscal imbalances higher than what we expected.

Rationale: We have revised downward our expectation of Pakistan's external performance, due particularly to an expected surge in imports stemming from substantial infrastructure-related CPEC projects in the next two years. In addition, we anticipate that further fiscal consolidation might be challenging, owing to lower-than-expected performance at the regional government level and the upcoming elections in June 2018. At the same time, we expect external imbalances to abate after the peak of CPEC investments. We believe Pakistan should have long-term economic benefits from the infrastructure investments.

The ratings on Pakistan remain constrained by a narrow tax base and domestic and external security risks, which continue to be high. These factors weaken the government's effectiveness and weigh on the business climate. We expect the Pakistan government to continue its reform agenda and maintain the key targets instilled by an International Monetary Fund (IMF) programme. A completed three-year reform programme, supported by an Extended Fund Facility (EFF) arrangement with the IMF, had helped to restore macroeconomic stability, reduce fiscal and external vulnerabilities, and promote growth-supporting reforms that have the potential to improve living standards. In September 2016, the IMF disbursed a final tranche of about $102 million under the $6.6 billion EFF. We estimate Pakistan's GDP per capita at $1,500 in 2017, which is in the bottom 10% of all sovereigns rated by S&P Global Ratings. We have revised upward our forecast of annual GDP growth to average 5.7% over 2017-2020.

Nevertheless, Pakistan's per capita GDP growth is around 3%, in line with peers' at this income level, due to a fast-growing population. Our stronger growth projections mainly reflect the large-scale investments associated with the China-Pakistan Economic Corridor (CPEC). In April 2015, China and Pakistan signed more than 50 agreements totaling $60 billion of Chinese investments over the coming decade in Pakistan. The cooperation under CPEC focuses mostly on energy projects such as coal, solar, hydroelectric, liquefied natural gas, and power transmission.

Pakistan suffers from domestic security challenges and long-lasting hostility with neighbouring India and Afghanistan. Inadequate infrastructure, mainly in transportation and energy, acts as further bottlenecks to foreign direct investments. The PML government has improved the security situation. It has also been closing infrastructure shortfalls through energy sector reforms, such as changes to tariff structures that have cut energy subsidies and reduction in power outages for industrial consumers. However, we believe there is much more to be done before we can see considerable uplift to the business climate.

Flexibility and performance profile: Metrics have deteriorated but remains in line with its rating level. Infrastructure investments lead to higher-than-expected external imbalances. We also project weaker general government fiscal balances, owing to lower-than-expected performance at the regional government level and the upcoming elections in June 2018.

“We forecast net general government debt to slightly exceed 60% of GDP in fiscal 2018. Pakistan's interest-servicing burden has reduced but remains extremely heavy as a share of fiscal revenue” the S&P states.

Pakistan's current account deficit widened to 4% of GDP in the fiscal year ended June 2017 from 1.7% the year before. This was mainly caused by a large trade deficit on the back of higher imports (17% increase) without a matching performance by exports. Imports of fuel, machinery, and food items increased sharply due to robust domestic demand and ongoing power and infrastructure development activities related to CPEC. Remittances, an anchor of Pakistan's current account, stabilised in 2017 after years of healthy growth. This was due to a slowdown in the Gulf countries. That said, current transfers held up despite a 6.5% overall decline in the South Asia region.

“We believe the current account deficit will remain high in the next two years, with narrow net external debt hovering at about 150% of current account receipts, which is substantially higher than we expected previously,” it further states.

Although CPEC is a decade-long initiative, the bulk of the capital goods imports happen in the first three years. Hence, we expect the external deterioration to be temporary and will likely reverse from mid 2019 onward.

Pakistan's fiscal profile has remained below our previous expectations. The change in general government debt stood at 5.4% of GDP in fiscal 2017. The main reasons for the higher-than-expected fiscal deficit were the increased spending of the provincial governments and the still-inefficient tax collection system. In addition, fiscal relief measures and tax incentives to support investment, exports, and domestic production also amplified the deficit. Although the government has reiterated its commitment to long-term fiscal consolidation, our forecast assumes a general government deficit of 6% of GDP for fiscal 2018, taking into account the upcoming elections. This compared with a 4.1% deficit assumed by the authorities.

We forecast the ratio of net general government debt to GDP to increase to just above 60% in fiscal 2018. Our assessment of Pakistan's debt burden is constrained by its enormously high level of interest expense to fiscal revenue. Interest expense consumes nearly a third of government revenue, partly a function of its narrow tax base. Pakistan's ratio of tax revenue to GDP remains one of the lowest among sovereigns that we rate. Pakistan's banking system is quite small by international standards with total bank assets making up 55% of GDP.

We do not have a Banking Industry Country Risk Assessment on Pakistan. However, its banking system appears stable, reflecting its high profitability, adequate liquidity and strong capitalisation. Combining our view of Pakistan's government-related entities and its financial system, we assess the country's contingent fiscal risks as limited.

We observed that the State Bank of Pakistan's (SBP) autonomy and performance had strengthened since the setup of a monetary policy committee for rate setting in January 2016, the statement concluded.

Courtesy www.thenews.com.pk

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