Moody's Investors Services, popularly known as Moody's has downgraded Pakistan's credit rating to Caa3 from Caa1 amid loan negotiations with the International Monetary Fund (IMF) and dwindling foreign exchange reserves. The downgrade in ratings is driven by Moody's assessment of Pakistan's fragile liquidity and external position significantly raises the country's sovereign default risk. Let's take a look at the causes behind this downgrade and what it means for the country and its economy.

In a Nutshell

• Overview
• Moody’s Credit Rating for Pakistan
• Factors Behind Low Rating
• Factors for Credit Rating Upgrade

What is Moody’s: An Overview

Moody's is one of the most widely recognized and respected credit rating agencies in the world. It provides financial analysis and credit ratings for countries and companies around the world. The agency was founded in 1909 and is headquartered in New York City.

Moody rates the creditworthiness of entities and countries by assigning credit ratings based on the likelihood that they will default on their financial obligations. Moody's rating ranges from AAA, which is the highest rating, to C, which is the lowest rating.

Banks, investors, and other financial institutions rely on research and ratings shared by Moody’s to assess the credit risk of potential investments or loans. In addition to credit ratings, Moody's also provides research and analysis on economic trends and industry sectors, as well as risk management solutions and training for businesses and governments.

Moody’s Credit Rating for Pakistan

Recently, Moody's released its credit rating for Pakistan, and the results have had a negative impact on Pakistan’s economy. Moody's currently rates Pakistan at Caa3 with a “stable” outlook, a slight upgrade from negative. This rating indicates that Pakistan's creditworthiness is very low, and the country is at high risk of defaulting on its financial obligations.

Reasons Behind Slashed Ratings

Let's take a look at the main reasons behind the low Moody’s credit score for Pakistan.

Debt Trap

One of the primary reasons for Pakistan's low credit rating is its high debt burden. Pakistan is in a never-ending debt trap for 75 years and the interest keeps piling on. Pakistan's external debt has been on the rise for several years, and currently, it stands at around $130 billion, which is equivalent to 50% of the country's GDP.

Pakistan's foreign external debt from Janurary 2020 to Januray 2023

This high level of debt makes Pakistan vulnerable to economic shocks, such as a sudden increase in interest rates or a sharp decline in exports. Even if the delayed IMF tranche of $1 billion USD is approved, Pakistan is still liable to pay a total debt of $21.95 billion in one year ; $19.34 billion in principal and another $2.60 billion in interest on the total debt according to the State Bank of Pakistan and Moody’s report.

Dwindling Foreign Exchange Reserves

The Pakistan Government's liquidity and external vulnerability risks have increased further since Moody's last review in October 2022. Since then, there's been a critical decline in foreign exchange reserves.

Currently, according to the State Bank of Pakistan reports, the reserves stand at $3.25 billion (USD), a meagre sum for an import-dependent country, which means the country has sufficient funds to cover less than a month of imports.

Weak External Position

Another factor contributing to Moody's low credit rating for Pakistan is the country's weak external position. Pakistan's exports have been declining for several years, and the country is heavily dependent on remittances from overseas Pakistanis to finance its current account deficit. Moody has highlighted the risk that any disruption to remittances or a sudden outflow of foreign capital could lead to a significant deterioration in Pakistan's external position.

Factors for Credit Rating Upgrade

Despite these challenges, there are some positive developments that could help to improve Pakistan's credit rating in the future. For example, Pakistan has made progress in implementing economic reforms, such as reducing subsidies and increasing tax revenue. Additionally, the country has recently secured financing from China, which could help to ease some of the pressure on its external finances.

In conclusion, Pakistan's credit rating from Moody's highlights some of the significant economic challenges facing the country. While there are some positive developments, such as progress on economic reforms and support from international institutions, it is clear that Pakistan's debt burden and weak external position remain significant risks to the country's creditworthiness.

Going forward, it will be crucial for Pakistan to continue implementing reforms and aim to build a robust and diversified economy to improve its credit rating and reduce its vulnerability to external shocks.

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