Islamabad, June 2 Moody's Investor Service on Thursday downgraded Pakistan's outlook from stable to negative, citing "heightened external vulnerability" and uncertainty around securing external financing to meet the country's needs.
"The decision to change the outlook to negative is driven by Pakistan's heightened external vulnerability risk and uncertainty around the sovereign's ability to secure additional external financing to meet its needs.
Moody's assesses that Pakistan's external vulnerability risk has been amplified by rising inflation, which puts downward pressure on the current account, the currency and — already thin — foreign exchange reserves, especially in the context of heightened political and social risk," the statement said.
It added that the country's "weak institutions and governance strength" had added uncertainty around the future direction of macroeconomic policy, including whether Pakistan would complete the International Monetary Fund's (IMF) Extended Fund Facility (EFF) programme and maintain a credible policy path that supports further financing, Dawn reported.
Explaining the decision to affirm the B3 rating, Moody's said it assumed that Pakistan would conclude its seventh review under the IMF EFF programme by the second half of this calendar year and would maintain its engagement with the Fund, leading to additional financing from other bilateral and multilateral partners.
"Moody's assesses that Pakistan will be able to close its financing gap for the next couple of years. The B3 rating also incorporates Moody's assessment of the scale of Pakistan's economy and robust growth potential, which will provide the economy with some capacity to absorb shocks.
"These credit strengths are balanced against Pakistan's fragile external payments position, weak governance and very weak fiscal strength, including very weak debt affordability," the statement said.
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