NEW DELHI: Standard & Poor’s on Monday downgraded Pakistan’s long-term credit rating to ‘B-Negative’ from ‘B’ as the new government struggled to put in place structural reforms amid heavy borrowing from external partners, primarily China.
“Pakistan’s economic outlook as well as its external position have deteriorated well beyond our previous expectations,” said S&P, adding that it also lowered the long-term issue rating on senior unsecured debt and Sukuk bond to ‘B-’ from ‘B’.
With weaker economic settings and limited progress in addressing fiscal imbalances following the elections in mid-2018, the rating agency said: “The prospects for a rapid recovery in fiscal and external settings are now diminished.”
More modest growth prospects and limited reserve buffers will continue to challenge the country’s external position even as the government receives financial aid from various partners. Negotiations with the International Monetary Fund had taken longer than anticipated, S&P said, believing that the reform timeline would be more protracted in nature.
Fiscal consolidation will be challenging as the economy slows owing to a paucity of growth drivers, and as the stimulus from China-Pakistan Economic Corridor (CPEC) investment fades.
“In our opinion, the government led by Pakistan Tehreek-i-Insaf (PTI) party has yet to introduce fiscal measures that are sufficient to bring about a substantial improvement in the general government deficit,” S&P noted. It expressed concern over the measures taken in the October 2018 mini-budget to increase revenue from petroleum products and infrastructure development and said additional measures would be necessary to bring about a more meaningful decline in fiscal deficit.
The ratings on Pakistan remain constrained by a narrow tax base and domestic and external security risks, which continue to be high. The country’s very low income level remained a rating weakness and inadequate infrastructure and security risks continued to act as structural impediments to foreign direct investment and sustainable economic growth. “The 2018 general elections have thus far not elicited a significant improvement in Pakistan’s economic environment and these difficulties would persist for some time, and key metrics will worsen further through 2019,” S&P said.
The agency estimated Pakistan’s GDP per capita at just over $1,500 in 2018, one of the lowest, and forecast annual real GDP growth to be at average 3.6 per cent over 2019-22. Pakistan’s per capita GDP growth is somewhat lower, at about 1.5 per cent, due to a fast-growing population.
“Our weaker growth projections mainly reflect the diminishing stimulatory impact of the investments associated with the CPEC, negative fiscal impulse as the government looks to rein in its deficit, and declining economic sentiment. Growth will also be constrained by domestic security challenges and long-lasting hostility with neighbouring India and Afghanistan,” it added.