Moody’s warns of challenges in raising funds

KARACHI: Pakistan is likely to face challenges in raising funds to mitigate the economic slowdown amid a bleak global outlook following the spread of the coronavirus pandemic, said ratings agency Moody’s on Monday.

“Pakistan […] would see a marked weakening in debt metrics because of large gross borrowing needs that raise interest payments when borrowing costs rise, and/or narrow revenue bases that push fiscal deficits wider when interest payments rise.”

It said that for externally vulnerable countries like Egypt and Pakistan, “persistent tightening in financing conditions will increase debt burdens, weaken debt affordability and intensify external vulnerability risk.”

In its stress test — assuming 20 per cent currency depreciation, 200bps increase in cost of financing and capital outflows rising to 2pc of the GDP — Moody’s said that Pakistan’s debt burdens would be in excess of 70pc of GDP, while interest payments will be close to or exceed 40pc of government revenue significantly weaker than the 12pc median.

It said that even though the country’s central bank has cut interest rate by a sizable 225 basis points during March, they may not be enough to offset the tightening in financing conditions related to local currency depreciation. In addition, given the country’s already stretched fiscal positions, challenges in raising financing may compound the already-weak investor sentiment and spark further capital outflows.

Risk averse investors have pulled out record-high funds from the emerging markets during the Jan-March quarter. In March alone, foreign investors pulled out $1.8 billion from Pakistan’s capital markets — equity, treasury bills and investment bonds. The outflows have put pressure on the rupee, which has depreciated to a record-low of Rs169.5 against the dollar.

It said that countries reliant on foreign currency borrowing from the private sector are particularly exposed, as domestic policymakers have limited capacity to mitigate capital flight. The ratings agency warned that should the outflows persist, it would lead to “deterioration in debt and debt-affordability dynamics arising from capital outflows that weaken local currencies and tighten domestic financing conditions.”

Published in Dawn, March 31st, 2020

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