Moody’s Investor Service on Thursday downgraded Pakistan’s sovereign credit rating by one notch from B3 to Caa1, citing increased government liquidity and external vulnerability risks, following devastating floods that hit the country earlier this year.
The floods, caused by abnormal monsoon rains and melting ice, submerged huge swathes of the South Asian country and killed nearly 1,700 people, mostly women and children.
The floods will also increase Pakistan’s external financing needs, increasing the risks of a balance of payments crisis, according to the rating agency.
Moody’s outlook on Pakistan remained unchanged at negative.
“The decision to downgrade the ratings to Caa1 is driven by increased government liquidity and external vulnerability risks and heightened debt sustainability risks, following the devastating floods that have hit the country since June 2022. The floods have exacerbated Pakistan’s liquidity and external credit weaknesses and significantly increase social spending needs, while government revenues are severely affected,” he said in a statement.
He said “debt affordability and a long-standing weakness in credit for Pakistan will remain extremely low for the foreseeable future.”
The Caa1 rating reflected Moody’s view that Pakistan would remain heavily dependent on funding from multilateral partners and other public sector creditors to meet debt repayments, in the absence of access to market funding at affordable costs.
“In particular, Moody’s expects Pakistan’s Extended Financing Fund (EFF) program to remain in place and provide an opportunity for financing from the IMF and other multilateral and bilateral partners in the short term.”