New York(National Times)- S&P Global Ratings on Wednesday upgraded Pakistan\u2019s long-term sovereign credit rating to \u2018B\u2019 from \u2018B-\u2019, citing an improving external position and gradual macroeconomic stabilisation, while assigning a stable outlook.<\/p>\n\n\n\n
S&P kept Pakistan\u2019s short-term credit rating steady at a \u2018B\u2019 while upgrading its transfer and convertibility rating to \u2018B\u2019 from a \u2018B-\u2019, signalling that Islamabad can meet its immediate debt payments and it is getting easier for foreign investors to exchange currency and move funds abroad.<\/p>\n\n\n\n
A country\u2019s sovereign credit rating serves as an indicator of its financial health for foreign investors. It assesses creditworthiness \u2014 the risk involved in lending money to the country, evaluated by its ability to repay its debts. Upgrading this rating gives global lenders greater confidence in the economy, helping the country attract foreign investment and borrow funds on better terms.<\/p>\n\n\n\n
In a statement<\/a>, the credit rating agency said the change in rating was based on its belief that the country had strengthened its institutional capacity, allowing it to implement reforms of the International Monetary Fund (IMF).<\/p>\n\n\n\n \u201cOur upgrade on Pakistan is predicated on improved institutional stability that has helped to implement critical IMF programme reforms,\u201d it said. \u201cThese reforms have quickened fiscal consolidation and rebuilt external buffers.\u201d<\/p>\n\n\n\n It noted that the institutional settings of Pakistan had strengthened over the last two years, in particular highlighting the passage of the IMF\u2019s Extended Fund Facility (EFF) $7 billion programme in September 2024 as \u201ccritical in restoring macroeconomic stability to the country and replenishing foreign reserves\u201d.<\/p>\n\n\n\n Pakistan has met most of the EFF programme targets \u201cthus far\u201d, it said, allowing for timely IMF disbursements.<\/p>\n\n\n\n \u201cA relatively stable political environment has been instrumental in this regard,\u201d it added.<\/p>\n\n\n\n The statement said that the IMF programme had boosted foreign reserves, which as of the end of last month had climbed to $25.3bn \u2014including the central bank\u2019s gold holdings \u2014 from a multi-year low of $6.7bn in December 2022.<\/p>\n\n\n\n \u201cThis is more than sufficient to cover the government\u2019s external principal payments of $16.4bn over the next 12 months,\u201d it said.<\/p>\n\n\n\n S&P also stated that it believed multilateral and bilateral funding, alongside continued access to commercial borrowing, would diversify Pakistan\u2019s external funding options.<\/p>\n\n\n\n Due to the government\u2019s commitment to structural reforms, it forecast the general government deficit at four per cent of the GDP for FY27, down from close to 8pc in the \u201ccrisis years\u201d of fiscal years 2022 and 2023.<\/p>\n\n\n\n It also noted that, although the State Bank of Pakistan (SBP) had tightened monetary conditions in April amid rising inflationary pressures from the Middle East conflict, domestic interest rates remained \u201cmuch lower\u201d than in previous years.<\/p>\n\n\n\n \u201cEntrenched economic reforms will bring about a sustained period of steady growth and fiscal consolidation,\u201d the agency said. \u201cWe anticipate sustained official financing will support Pakistan in meeting its external obligations and that the country will continue to roll over its commercial credit lines over the next 12 months.\u201d<\/p>\n\n\n\n S&P added that, if the country\u2019s commitment to fiscal consolidation were to diminish and cause current external or fiscal indicators to deteriorate \u2014 \u201ccontrary to expectations\u201d \u2014 it may lower its ratings. It would also view surging interest rates as a sign of domestic financing stress.<\/p>\n\n\n\n On the other hand, the agency may raise its rating if fiscal and external metrics \u201ccontinue to strengthen structurally\u201d. It noted that this may happen if fiscal deficits narrow and government revenue continues to rise \u201cwhile financing costs moderate, with strong expenditure controls\u201d.<\/p>\n\n\n\n \u201cConcurrently, improvements in Pakistan\u2019s external indicators resulting in narrow net external debt falling below 100pc of current account receipts, and gross external financing needs [declining] to less than 100pc of the sum of current account receipts and usable reserves, may see the ratings raised,\u201d it said.<\/p>\n\n\n\n Awais Ashraf, director of research at AKD Securities, said the government\u2019s reform-oriented agenda had translated into stronger fiscal discipline through a combination of \u201crobust tax revenue growth and prudent expenditure management\u201d. He added that the external account had strengthened on the back of sustained growth in workers\u2019 remittances and a continued focus on expanding IT exports.<\/p>\n\n\n\n As a result, he the country\u2019s foreign exchange reserves reached a record high of $18.4bn at the end of June, while external debt has remained broadly stable over the past four years.<\/p>\n\n\n\n \u201cDespite these notable improvements in macroeconomic fundamentals, the KSE-100 index\u2019s current valuation does not fully reflect the strengthening economic outlook,\u201d Ashraf said. \u201cThe last time Pakistan was upgraded to a \u2018B\u2019 rating by S&P Global, the KSE-100 was trading at 9.9x forward earnings (estimations of future profits), compared with the current valuation of 7.6x.\u201d<\/p>\n\n\n\n He added that the market was currently offering a dividend yield of nearly 7pc, significantly higher than the 5.5pc dividend yield at the time of the previous upgrade. Dividend yield measures a company\u2019s annual dividend payments as a percentage of its current share price.<\/p>\n\n\n\n Last month, British financial institution Barclays upgraded<\/a> Pakistan\u2019s dollar bonds to \u201coverweight\u201d after having lowered the rating the previous month, citing improved oil market prospects.<\/p>\n\n\n\n In April, Fitch Ratings, one of the world\u2019s top three agencies, affirmed<\/a> Pakistan\u2019s long-term foreign currency issuer default rating (IDR) at \u201cB-\u201d with a \u201cstable outlook\u201d. However, it highlighted that the country\u2019s high exposure to the global energy price shock remained a key risk, particularly if it led to a sharp drop in foreign exchange reserves.<\/p>\n\n\n\n