Pakistan’s Economic Outlook Improves as BofA Upgrades Bonds and Moody’s Affirms Rating

Pakistan’s economic prospects have received a positive boost from the Bank of America (BofA), which raised its recommendation for Pakistan dollar bonds to overweight from market-weight, citing falling political uncertainty after the elections and possible rating improvements.

In a note to investors, BofA strategists, led by Vladim R Osakovskiy, said they upgraded Pakistan to overweight with a fair value range of $70-75 in the longer end of the curve, and initiated a trade buy Pakistan notes due in 2026 with a target of 83, stop loss of 69.

The bonds are trading at 77 currently, indicating a strong demand from international investors. BofA said the likely repayment of $1 billion bonds maturing in April 2024 would provide support to the whole curve, but mainly bring 2025-2026 bonds into the spotlight of market attention, likely forcing further bull-steepening.

BofA also said the longer end of the curve may benefit from likely progress with the new International Monetary Fund (IMF) programme, as the market may start to price in gradual rating improvements, as already hinted at by Standard & Poor’s (S&P), which affirmed Pakistan’s B- rating with a stable outlook in January.

BofA noted that the elections-related political uncertainty was falling, as the coalition government led by the Pakistan Muslim League-Nawaz (PML-N) and the Pakistan Peoples Party (PPP) had a clear majority in the parliament and was expected to pursue economic reforms in line with the IMF conditions.

However, BofA also cautioned that there were still some political tail risks, as the market may closely monitor cabinet appointments, evaluating key members on their ability to deliver on IMF conditions. BofA also said that Pakistan’s external and fiscal vulnerabilities remained high, and that the country needed to secure sufficient financing from other multilateral and bilateral partners to meet its large external financing needs.

On the other hand, Moody’s Investors Service, one of the three major global credit rating agencies, maintained Pakistan’s long-term issuer rating at Caa3 with a stable outlook, suggesting that the country was facing high credit risk, as doubts arose over its ability to secure a new IMF programme after the expiry of the current Stand-By Arrangement (SBA) in April 2024.

Moody’s completed a periodic review of the ratings of Pakistan and stated that Pakistan’s ratings remained unchanged, reflecting the government’s very high liquidity and external vulnerability risks, as the very low levels of foreign exchange reserves remained well below what is required to meet its very high external financing needs over the near to medium term.

Moody’s also said that Pakistan’s credit profile was constrained by its very weak fiscal strength and elevated political risks, while taking into account its large economy and moderate growth potential, which contributed to its moderate economic strength.

Moody’s acknowledged that Pakistan’s government liquidity and external vulnerability risks had eased somewhat, as the caretaker government had maintained economic stability and pushed through some reforms over the past few months, unlocking financing from the IMF and other multilateral and bilateral partners and resulting in a modest accumulation of foreign exchange reserves.

However, Moody’s warned that Pakistan’s ability to secure loans from other countries and institutions would be severely limited until a new IMF programme was agreed upon, and that there was high uncertainty around the newly elected government’s willingness and ability to quickly negotiate a new IMF programme soon after the current one expired in April.

Moody’s said that the forthcoming coalition government’s electoral mandate may not be sufficiently strong to pursue difficult reforms that would likely be required by a successor programme, and that social pressures and weaknesses in governance may also raise challenges in meeting criteria for future IMF funding.

Moody’s said that Pakistan’s rating would likely be upgraded if Pakistan’s government liquidity and external vulnerability risks decreased materially and durably, which could come with a sustainable increase in foreign exchange reserves and a resumption of fiscal consolidation. However, Moody’s also said that Pakistan’s rating would likely be downgraded if Pakistan were to default on its debt obligations to private-sector creditors and the expected losses to creditors as a result of any restructuring were larger than consistent with a Caa3 rating.

The contrasting views of BofA and Moody’s reflect the mixed signals on Pakistan’s economic prospects, as the country faces both opportunities and challenges in its quest for macroeconomic stability and growth. Pakistan’s economic performance in the coming months will depend largely on its ability to secure a new IMF programme and implement the necessary reforms, while maintaining political and social stability.

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