Moody's upgrades outlook on Pakistan

Moody's Investors Service on Monday upgraded its outlook on rating of Pakistan's foreign currency bond to "stable" from "negative" on stabilisation in the country's external liquidity position. However, Pakistan continues to draw a "junk" sovereign rating owing to its poor fiscal and debt position.

This means that earlier, there were more chances of Pakistan's rating being downgraded, and now there are high chances of it being retained at the current level of Caa1, which is the seventh lowest rating even in the junk grade.

This also implies it could be a bit easier and cheaper for Pakistan to raise funds abroad, since outlook was upgraded on foreign currency denominated bonds.

Two years ago, Moody's had downgraded Pakistan by a notch due to strain on the country's external payments position as a result of a rising trade deficit and decline in capital inflows. At that time, the rating agency had said Pakistan's deteriorating balance of payments would raise the probability of a default in a year or two.

In fact, the strained condition of Pakistan's public-sector finances and weak institutional features had resulted in the default in May 2012 by the government-owned Central Power Purchasing Agency on arrears to the private independent power producers, the payments of which were guaranteed by the government.

The rating agency, however, noted the situation has reversed over a year as the external liquidity position has improved - a modest current-account deficit at one per cent of the GDP for 2013-14 (ended June) along with a rise in financial inflows.

"Importantly, repayments to the IMF (International Monetary Fund) from the previously-suspended programme are tapering off, even as disbursements from the ongoing programme continue," Moody's noted.

Moody's also said the foreign reserves of Pakistan have increased from $2.9 billion in February 2014 to $9 billion by the end of June 2014.

Even then, Moody's did not upgrade the Pakistan's rating because of the country's structurally-high fiscal deficit and weak debt position.

The fiscal deficit stood at 8.1 per cent of the GDP and the debt-to-GDP ratio at 63 per cent in 2013.