S&P downgrades outlook on Pakistan’s long-term ratings to ‘negative’

Rating agency Standard and Poor’s (S&P) has revised the outlook on Pakistan’s long-term ratings from “Stable” to “Negative” on the increasing risk to the government’s liquidity posed by a difficult external landscape.

However, it affirmed our ‘B-‘ long-term and ‘B’ short-term sovereign credit ratings on Pakistan, as well as ‘B-‘ long-term issue rating on Pakistan’s senior unsecured notes and sukuk trust certificates.

Pakistan’s external position is weakening due to higher commodity prices, rupee depreciation, and tighter global financial conditions. External resources are likely to remain under pressure even after expected disbursements from the IMF under the restored Extended Fund Facility (EFF) program, rating agency said in a statement.

The government’s fiscal performance will face increasing strain from heightened interest service costs, although key reform initiatives could help to address weaknesses over time.

The negative outlook reflects growing risks to Pakistan’s external liquidity position over the next 12 months amid an increasingly difficult economic landscape.

Referring to Pakistan’s institutional and economic profile, S&P said near-term reform prospects dependent upon political stability and macroeconomic conditions.

The global economic slowdown poses fresh risks to Pakistan’s post-pandemic recovery.

“We expect Pakistan to achieve moderate growth over the next few years, but tighter domestic monetary conditions and elevated inflation are likely to weigh on activity”, rating agency added.

Pakistan’s government has indicated a greater willingness to implement difficult fiscal reforms, but these policies will be challenged by inflation and political risk over the next 12 months.

Pakistan’s economy continues to rebound from a pandemic-driven slowdown. Domestic demand continues to recover. But, it is now facing a new challenge in the form of rising prices, particularly for staple goods. Prevailing price dynamics, including costlier edible oils, fuel, electricity, and grains, are likely to hurt the pace of private consumption growth in the current fiscal year ending June 2023, it said.

Pakistan has made progress toward implementing economic and fiscal reforms under its Extended Fund Facility (EFF) with the International Monetary Fund (IMF).

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