Moody's sees strong growth for Pakistan on China links

But government's debt burden is high and fiscal deficits remain relatively wide

Pakistani stockbrokers at the Pakistan Stock Exchange (PSX) in Karachi. Moody's sees strong economic growth for the country. Rizwan Tabassum / AFP

Moody's Investors Service has today affirmed Pakistan's B3 issuer and senior unsecured ratings, and maintained a stable outlook.

Pakistan's medium-term growth outlook is strong, Moody's said, supported by the China-Pakistan Economic Corridor (Cpec) project" to address critical infrastructure constraints, and the continuing effects of macrostability-enhancing reforms started under the International Monetary Fund (IMF)'s Extended Fund Facility (EFF) program in 2013-16".

However, the agency added that government's debt burden is high and fiscal deficits remain relatively wide, driven by a narrow revenue base that also restricts development spending. "In addition, foreign exchange reserve adequacy, albeit stronger than a few years ago, would still be vulnerable to any significant increase in imports. Domestic politics and geopolitical risk also continue to represent a significant constraint on the rating."

Concurrently, Moody's has affirmed the B3 foreign currency senior unsecured ratings for The Second Pakistan International Sukuk Co and The Third Pakistan International Sukuk Co.

Moody's said the outlook for growth has strengthened as a result of increased macroeconomic stability due to reforms started during the three-year IMF extended fund facility programme and following the launch of the Cpec project in 2015.

In the fiscal year ended June 2016, real GDP growth reached 4.5 per cent, up from 4.1 per cent in both 2015 and 2014, The agency said. Moody's expects such growth rates to be maintained or exceeded in the next few years. By contrast, the median rate of growth for B-rated sovereigns was just 2.7 per cent in 2016.

Moody's said that from a macroeconomic stability perspective, the IMF programme succeeded in encouraging fiscal deficit reduction, more rigorous inflation management and the rebuilding of foreign exchange reserves. "While further progress will be challenging, as fiscal metrics remain weak and reserve adequacy is relatively fragile, our baseline assumption is that the steps that the authorities have taken in the last 3 to 4 years will not be reversed," it said.

Moody's expects real GDP growth will rise towards 6 per cent over the next few years, as the economic benefits of the Cpec gradually materialise and past policy reforms continue to support economic potential. The Cpec will increase Pakistan's competitiveness and lift potential GDP growth by relieving supply-side constraints, particularly in power and transport infrastructure, and by catalyzing private sector investment, the agency said.

"However, security related issues and a weak track record of public project implementation suggest the pace of project execution will be relatively slow," Moody's added. "Therefore, while the Cpec will support Pakistan's credit profile, Moody's expects the economic impact to materialise more slowly than the government envisions, resulting in real GDP growth closer to 5.5 per cent over the next two years, compared to government forecasts for 6 per cent growth in fiscal year 2018, rising to 7 per cent by 2020."