Keeping ratings as they are

The retention of the B+ rating by Fitch was more than it seemed

The retention by Pakistan for its B+ rating for its sovereign debt, issued by Fitch, the rating agency, was probably tougher than it seems, as it indicates that Pakistani sovereign debt is considered safe. Well, not really gilt-edged, but safe enough; at least not junk bond status. It should be noted that It did not downgrade Pakistan’s rating, even though the US-Israel-Iran war gave it a perfect excuse, and especially as the country’s foreign exchange holdings have come under pressure as oil prices go up. The price has gone up to $100 per barrel, to reflect the breakdowm of the US-Iran talks over the weekend in Islamabad. However, Fitch mentioned two important things in its report. First, that recent policies and the resulting build-up of foreign exchange had led to the country’s foreign exchange reserves having a buffer to absorb the oil shock resulting from this war. Second, it said that Pakistan would benefit tangibly from its mediatory role, and this would partially ease external pressures. However, it duly noted that if the oil shock led to a sharp decline in foreign exchange reserves, there would be a major risk.

It is difficult to say that Fitch’s approval of Pakistan’s following the IMF programme sedulously is evidence that the IMF is merely a glorified credit agency, or whether it is the other way round: the IMF being a credit agency, its programmes are such that credit rating agencies approve of them. It must not be forgotten that one purpose of going on an IMF programme is to ensure that the country retains access to the global money markets.

The retention of the rating is all the more creditable because it comes when Pakistan has returned the $3.5 billion UAE deposit, which was meant to bolster its foreign exchange reserves. It is also crucial because Pakistan is looking towards allied countries, basically in the Middle East, to give financial support. Though the reasons for that support are political rather than economic, knowing that Pakistan’s foreign debt is secure would be helpful. The other major rating agency, Standard & Poor, has rated Pakistan Caa1, with a Stable outlook. That implies that it too may be ready to carry out an upgrade. However, there is some claim that the money markets are fighting shy of loans to Pakistan, leaving it to borrow from institutional lenders. That may change if ratings continue improving.