Pakistan’s policy continuity in doubt amid political turmoil, says Moody’s

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ISLAMABAD: While the Pakistan Stock Exchange and the rupee made a steep recovery, Moody’s Investors Service on Monday stressed Pakistan’s “ significant query over policy durability” and falling foreign exchange reserves.

Still, the New York- grounded credit standing agency read a stable outlook for Pakistani banks and estimated the country’s gross domestic product (GDP) growth rate to remain between three and four per cent.

Opining on the ouster of former high minister Imran Khan through a no- confidence vote and the posterior evidence of Shehbaz Sharif as the country’s new premier until August 2023, Moody’s said that “ the political bouleversement reflects the volatility that besets Pakistan’s political terrain and raises significant query over policy durability, at a time when Pakistan is freighted with surging affectation, widening current account poverties and declining foreign- exchange reserves”.

It said it was unclear how the new government would approach the International Monetary Fund’s (IMF) programme during this interim period before the coming election is called, dragging the query around whether Pakistan would be suitable to secure backing from the IMF to bolster its foreign- exchange reserves, which have fallen to a position sufficient to cover only about two months of significances.

Meanwhile, it said the banks’ stable outlook was supported by an expanding frugality and their sound finances and hence maintained a stable outlook for the banking sector (B3 stable).

Moody’s anticipated real GDP growth of between 3pc and 4pc for the ongoing financial time and between 4pc and 5pc for the 2023 financial time, with credit growth surpassing 12pc.
Pakistani banks successfully navigated the epidemic, although nonperforming loans (NPLs) remained high but astronomically stable at around 9pc of gross loans, it said.

Profitability will rise relatively, with returns on means to remain around 1pc to1.1 pc, supported by new business generation and gradationally recovering net interest perimeters. Still, investment earnings are likely to be lower.

Tip payouts are anticipated to rise this time, but earnings should be sufficient to keep capital at current, rather modest, situations. Pakistani banks will remain deposit funded and liquid.

These are credit strengths, but their high exposure to Pakistan government securities means their credit biographies are anchored to the low-rated autonomous. Operating conditions will be probative for banks, despite new pressures. The Russia-Ukraine military conflict will press Pakistan’s current account deficiency via advanced canvas prices, while rising affectation will weaken private- sector spending. Sharp increases in interest rates will also weigh on private- sector investment.

The GDP growth cast is grounded on prospects of reform docket and the China-Pakistan Economic Corridor (CPEC) helps boost profitable growth. Also, government support for specific sectors, similar as a subvention scheme for casing finance, and subsidised interest rates and partial credit guarantees for small businesses and husbandry, will also boost credit demand.

“ Asset threat is substantially linked to banks’ high exposure to government securities. Pakistani banks’ exposure to government securities accounts for 45pc of their total means and around seven times their equity, one of the loftiest situations among our rated banks encyclopedically. This exposure links their credit biographies to the autonomous’s. After a moderate rise in problem loans during the epidemic, we now anticipate these to stay around 9 of gross loans for the rated banks,” Moody’s said.

Loans to sugar, fabrics and leather, and electronics sectors will be the most vulnerable. The phased preface of the new IFRS-9 account standard containing stricter rules on loan- loss provisioning will probably increase provisioning requirements.

Capital buffers will be stable but modest. According to data from the State Bank of Pakistan (SBP), the banking sector’s capital-to- means rate stood at6.3 pc as of December 2021. The sector’s reported Tier-1 capital stood at13.5 pc of threat-weighted means. “ Once we risk- weight government securities at 100pc in line with the government’s B3 credit standing, still, palpable common equity (TCE) to acclimated threat-weighted means drops to a modest7.4 pc for the rated banks,” it said.

The SBP has also introduced fresh Shariah-biddable liquidity installations for Islamic banks. Some pressure points remain but these will be manageable.

The preface of a Treasury Single Account will lead to modest deposit exoduses and Pakistan’s addition on the Fina­ncial Action Task Force’s (FATF) slate list of countries with deficientanti-money laundering administrations is being addressed with 26 out of the 27 conduct needed formerly completed.

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