KARACHI: Fitch Ratings has assigned a ‘B-‘ rating to Pakistan’s proposed U.S. dollar-denominated bond, with a Recovery Rating of ‘RR4,’ the ratings agency announced.
Pakistan plans to use proceeds from the bond for general budgetary and sovereign financing purposes, according to Fitch.
The bond rating is aligned with Pakistan’s Long-Term Foreign-Currency Issuer Default Rating, while the Recovery Rating reflects Fitch’s expectation of average recovery prospects in the event of a default, the agency said.
Fitch affirmed Pakistan’s Long-Term Foreign-Currency Issuer Default Rating at ‘B-‘ with a stable outlook on April 13.
Fitch cited governance concerns as a key factor in the bond’s environmental, social and governance profile. The agency gave Pakistan an ESG Relevance Score of 5 for political stability and rights, as well as for rule of law, institutional and regulatory quality, and control of corruption.
Those scores reflect the significant weight Fitch places on World Bank Governance Indicators in its sovereign rating model. Pakistan ranks in the 18th percentile on those indicators, Fitch said.
Because the bond’s rating is tied to Pakistan’s broader sovereign credit rating, it is subject to the same factors that could push the country’s rating up or down, Fitch said.
The agency said a renewed downturn in external liquidity, driven by sustained high oil prices or a sharp drop in remittances, could lead to a downgrade. A stalling of fiscal consolidation efforts that causes government debt and debt-servicing metrics to worsen could also trigger a negative rating action, Fitch said.
Conversely, Fitch said an upgrade could follow further easing of external financing risks, including a stronger ability to secure outside funding and a sustained rebound in foreign currency reserves beyond the agency’s current forecasts.
A significant reduction in government debt and debt-servicing burdens, for example, through fiscal consolidation measures consistent with International Monetary Fund program commitments that improve tax revenue collection, could also support a higher rating, according to Fitch.
