Moody's warns Pakistan against growing government debt

Pakistan's external debt will grow to a whopping USD 79 billion by June this year, higher than initial estimates suggested, Moody's Investors Service has warned.
Due to increasing debt, the country's weak fiscal strength will weigh in on its ability to afford the ever growing debt burden, Daily Times quoted the rating agency as saying.
In its latest report, Moody's Investor Service said that Pakistan's challenges include a relatively high general government debt burden, weak physical and social infrastructure, a fragile external payments position and high political risk.
By the end of fiscal year 2016-17, Pakistan's external debt will increase to USD 79 billion out of which the public sector component will be USD 77.7 billion, according to Moody's.

The forecast for the outgoing fiscal year is much higher than what was earlier assessed on the basis of data released by the State Bank of Pakistan.
The central bank had shown total external debt and liabilities at USD 74.2 billion by the end of December 2016. This included USD 64.5 billion public external debt. Moody's report has shown external debt at USD 64.4 billion by end of fiscal year 2013. If the debt grows to USD 79 billion, it means that an additional USD 14.6 billion in debt has been added in the past four years alone.

The Nawaz Sharif government is facing criticism for increasing the country's debt burden, which is a direct result of low levels of exports and foreign direct investment. The government's narrow revenue base weighs on debt affordability and the level of external public debt poses a moderate degree of credit risk, according to the report.

Meanwhile, exports and remittance inflows have slowed and capital goods imports have risen, resulting in renewed pressure on the external account.
The government's debt burden has steadily increased in the past four years from 63.5 per cent of GDP to 66.5 per cent, Moody's said.
"At 66.5 per cent of GDP, the debt stock is higher than the 52.6 per cent median for B-rated sovereigns and remains a constraint on Pakistan's fiscal strength," it added.
Moody's has retained Pakistan's position at B3 rating. "Approximate 30 per cent of foreign currency debt does expose the sovereign (Pakistan) to marked changes in the cost of refinancing debt should the currency weaken abruptly," according to the report.

Debt affordability metrics, which include interest payments as a percentage of revenues and GDP, have been high in Pakistan relative to the median for B-rated sovereigns, which is a key constraint on the sovereign credit rating.
Moody's has also assessed Pakistan's susceptibility to event risk as "High", driven by political risks and government liquidity risks stemming from high gross borrowing needs, due to the government's large rollover requirements.
It said that large fiscal deficits and a reliance on short-term debt have contributed to very high gross borrowing requirements, which is a key rating constraint. At 32 per cent of GDP, Pakistan's gross borrowing need in 2017 is the largest among all rated sovereigns, after Egypt.

Moody's has also projected higher budget deficit for the outgoing fiscal year. "We expect that the fiscal deficit will widen further to about 4.7 per cent of GDP in fiscal year 2017 and 5 per cent in FY 2018 despite the government's intention to advance fiscal consolidation."
In addition, the need to increase development spending - particularly related to China-Pakistan Economic Corridor (CPEC) power infrastructure investments - combined with political pressure to maintain power subsidies in advance of the 2018 general election, will likely weigh on the deficit, it added.
Moody's also noted that the implementation of the CPEC project has the potential to transform the Pakistani economy by relieving infrastructure bottlenecks, and stimulating both foreign and domestic investment.

However, headwinds to further fiscal consolidation and renewed pressure on the external account present downside risks to the rating, said the ratings agency.
"Since 2013, implementation of economic reforms and increased foreign investment flows have contributed to macroeconomic stability and higher GDP growth. However, government debt remains elevated and pressure on the external account continues," said William Foster, a Vice President and Senior Credit Officer at Moody's.
According to the document, the stable outlook represents balanced upside and downside risks to the sovereign credit profile.
Support from multilateral and bilateral lenders has also bolstered Pakistan's foreign currency reserves and fostered progress on economic reforms.