Moody’s Upgrades Pakistan’s Credit Rating to Caa1

Moody’s Ratings has adjusted Pakistan’s long-term sovereign credit rating upwards to Caa1 from Caa2. This decision acknowledges enhancements in external liquidity and a more robust outlook for near-term repayments, attributed to ongoing collaboration with the International Monetary Fund (IMF) and various bilateral lenders. The stable outlook also acknowledges ongoing structural economic challenges.

According to Moody’s assessment, the upgrade signifies a “decline in default probabilities.” This is supported by the growth of Pakistan’s foreign exchange reserves, which have benefited from IMF program disbursements and the refinancing of maturing bilateral debts.

The nation’s import coverage has seen improvement, now exceeding two months compared to less than one month at the start of 2023. This offers relief from immediate balance-of-payments concerns.

It’s important to note that Caa1 still denotes a high-risk classification within the sovereign rating system, remaining considerably below investment grade. This makes borrowing on the international stage expensive, and investments are generally limited to those with higher risk tolerances.

Pakistan’s external financing demands continue to be substantial, influenced by current account needs and significant upcoming debt repayments.

Moody’s cautions that without consistent reforms and continuous IMF support, the financial situation could quickly regress.

Consequently, the upgrade carries more symbolic weight, indicating a move away from imminent default rather than a full return to financial stability.

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The market response has been moderate. The Pakistani rupee saw a slight appreciation against the US dollar, while yields on Pakistan’s 2026 Eurobonds decreased by 25 basis points, which shows some improved confidence.

Analysts suggest that the adjusted rating might encourage some portfolio investments and aid bilateral discussions, though it won’t immediately restore Pakistan’s ability to access affordable international borrowing options.

Moody’s previously upgraded Pakistan’s rating in August 2024, moving it from Caa3 to Caa2 following the IMF’s approval of a new loan agreement.

This recent action builds on prior progress; however, economists emphasize the importance of maintaining reform efforts through 2026 to sustain recent stability.

Understanding Moody’s ratings: Where Caa1 stands

Moody’s uses a rating system for sovereign credit, ranging from the highest quality (Aaa) to the lowest (C). These ratings represent their analysis of a country’s ability to repay its debts.

  • Aaa, Aa1-Aa3, A1-A3: Represent a very strong to adequate ability to handle debt payments
  • Baa1-Baa3: Nations in this category can borrow at relatively favorable interest rates
  • B1-B3: Indicate substantial credit risk and vulnerability to negative events
  • Caa1- Caa3: Suggest very high credit risk, reliant on positive conditions to fulfill obligations
  • Ca: Signifies likely or imminent default, with potential for some recovery.