Moody’s, S&P, Others Will Further Improve Pakistan’s Rating: Report

Pakistan’s economy is gradually stabilizing with the new IMF program as external accounts are showing substantial improvement, inflation is coming down sharply and fiscal accounts are consolidating. However, growth is expected to remain modest on the back of lower agriculture growth, Topline Securities said in a report. Pakistan’s External Repayments (net of rollover and refinances) are expected at US$ 10 billion for FY25, as per the Governor State Bank’s comment in one of the analyst briefings. With current account deficit expectations of US$ 1.3 billion for FY25, the gross financing requirement (net of rollover/refinances) is expected at US$ 11.3 billion, a manageable amount. As per the IMF document, Pakistan Gross external financing requirement is at 9 9-year low of US$ 18.8 billion. As a first sign of external stability, two rating agencies have already upgraded Pakistan’s rating by one notch. On Jul 29, 2024, Fitch upgraded Pakistan’s long-term issuer rating by one notch to CCC+, later on August 28, 2024, Moody’s upgraded Pakistan to Caa2. Topline expects Pakistan’s rating to further improve going forward on the back of rising FX reserves, resulting in opening doors for the issuance of long-term instruments in international Capital Markets in the next few years. Pakistan liquid FX reserves are expected to touch the US$ 13 billion mark by June 2025, the first time since Mar 2022 due to the successful completion of the previous Standby Arrangement (SBA) and the start of a new IMF program which is likely to open more funding from bilateral and multilateral. Pakistan Rupee (PKR) on the back of external account stability and higher inflows has appreciated 2.6 percent in FY24 and 0.3 percent in FY25TD against US$. The PKR/USD will land at Rs. 277-282 by June 2025 and Rs. 295-300 by June 2026. Inflation during FY25 is expected to average 7-8 percent after recording 23.4 percent in FY24. The sharper decline in the inflation rate is attributed to a higher base effect, faster disinflation in the food segment, and negative fuel cost adjustments in September and October 2024. The report sees the policy rate to come down to 12.5-13.5 percent by June 2025 from the current level of 17.5 percent and a peak of 22.5 percent in June 2024. 6M KIBOR and 6M T-bill in anticipation of further decline in interest rate are at 13.43 percent, and 12.87 percent, respectively, 407-463 bps below policy rate vs. last five-year average spread of 62bps and 46bps for KIBOR and T-bills, above the policy rate. Real GDP growth is expected around 2.5-3.0 percent in FY25 despite muted growth in agriculture amidst a weak cotton and wheat crop outlook. Growth is likely to be led by the services sector on the back of the gradual resumption of economic activities. The agriculture sector after posting a 19-year high growth of 6.4 percent in FY24 is expected to post 1 percent growth as major crops are expected to show a contraction of 8.1 percent based on the poor outlook of cotton and wheat crops.