Policy Continuity In Pakistan In Doubt: Moody’s


International credit rating agency Moody’s described the overall outlook of Pakistan’s banking system as “stable” amid the prevailing economic challenges and recent political turmoil.

However, the US-based firm terming the no-confidence motion against former prime minister Imran Khan as “credit negative” highlighted the South Asian country’s “significant uncertainty over policy continuity” and falling foreign exchange reserves.

“The political upheaval reflects the volatility that besets Pakistan’s political environment and raises significant uncertainty over policy continuity, at a time when Pakistan is encumbered with surging inflation, widening current account deficits and declining foreign-exchange reserves,” Moody’s said.

The credit rating agency said there was uncertainty around whether the country would be able to secure financing from the IMF to bolster its foreign-exchange reserves, which have fallen to a level sufficient to cover only about two months of imports.

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The agency expected real GDP growth of between 3% and 4% for the ongoing fiscal year and between 4% and 5% for the FY2023, with credit growth surpassing 12%. Nonperforming loans (NPLs) remained high but broadly stable at around 9% of gross loans.

Profitability will rise moderately, with returns on assets to remain around 1% to 1.1%, supported by new business generation and gradually recovering net interest margins. However, investment gains are likely to be lower.

These are credit strengths, but their high exposure to Pakistan government securities means their credit profiles are anchored to the low-rated sovereign. Operating conditions will be supportive for banks, despite new pressures. The Russia-Ukraine military conflict will pressure Pakistan’s current account deficit via higher oil prices, while rising inflation will weaken private-sector spending. Sharp increases in interest rates will also weigh on private-sector investment.

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The GDP growth forecast is based on expectations of reform agenda and the China-Pakistan Economic Corridor (CPEC) helps boost economic growth. Also, government support for specific sectors, such as a subsidy scheme for housing finance, and subsidised interest rates and partial credit guarantees for small businesses and agriculture, will also boost credit demand.

“Pakistani banks’ exposure to government securities accounts for 45% of their total assets and around seven times their equity, one of the highest levels among our rated banks globally. This exposure links their credit profiles to the sovereign’s. After a moderate rise in problem loans during the pandemic, we now expect these to stay around 9% of gross loans for the rated banks,” Moody’s said.

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Loans to sugar, textiles and leather, and electronics sectors will be the most vulnerable. The phased introduction of the new IFRS-9 accounting standard containing stricter rules on loan-loss provisioning will likely increase provisioning needs, the report stated.


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