Fitch Assigns Junk Rating to Pakistan on Weak Fundamentals

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  • Pakistan's B rating signifies its debt is "highly speculative"
  • Economic fundamentals still weak compared with B rated peers

Fitch Ratings assigned a B credit rating to Pakistan with a stable outlook, and said the country’s economic fundamentals are "weak" even compared with similar rated peers.

"Pakistan’s B ratings balance the country’s underdevelopment, political instability, weak public finances and history of macroeconomic volatility against the stabilization and progress on reforms achieved under the country’s latest International Monetary Fund (IMF) program," Fitch analysts led by Andrew Colquhoun, wrote in a report on Tuesday. This is the first time Fitch has given Pakistan a rating.

Fitch’s rating indicates "highly speculative" debt that is two levels below investment grade. It follows Moody’s move earlier this year to lower Pakistan’s credit risk warning to "high" from "very high."

The IMF deal helped Prime Minister Nawaz Sharif avert a balance of payments crisis. The Pakistani rupee is the third-best performer this quarter among 12 Asian currencies tracked by Bloomberg.

Policy slippages that cause accelerating inflation or a widening current account deficit or a sharp deterioration in political stability could trigger a downgrade, Fitch warned. However, lower political risk and improved security -- together with larger foreign exchange reserves and sustained fiscal consolidation -- may lead to an upgrade, the company said.

"The ratings incorporate an assumption that Pakistan’s relations with India do not deteriorate to the point of renewed armed conflict," the analysts wrote.

China-Pakistan Economic Corridor

As tensions escalate along the world’s most militarized border, Pakistan’s relations with China are deepening. China has offered to invest about $46 billion in infrastructure projects -- nearly equal to the amount of foreign aid the U.S. has provided to Pakistan over the past decade to support its war in Afghanistan.

If realized, the investments will help Sharif revive Pakistan’s economy, which suffers from chronic power failures and an insurgency that has killed more than 50,000 people since 2001.

"The China-Pakistan Economic Corridor initiative announced in April could significantly strengthen Pakistan’s economic fundamentals," Fitch said. "However, the rate of progress with the scheme and the cost of any debt financing incurred by the Pakistani sovereign remain to be seen."