Pakistan and its senior notes were downgraded to CCC+ from B- by S&P due to “continued weakening” of its external, fiscal, and economic metrics. High inflation, interest rates, the impact of the floods and market conditions will pressure Pakistan’s fiscal and external positions over the next one year. Besides, after successfully completing the reviews under the IMF’s EFF program, Pakistan faces fresh challenges in meeting the performance requirements for subsequent reviews. The rating agency notes that disbursements under the EFF, which began in July 2019, have totaled ~$4bn thus far, including a $1.2bn allocation in August 2022. The tenure of this is set to end by August 2023 or earlier, thus giving limited time for the government to implement meaningful reforms. Adding to the negatives are Pakistan’s narrow tax base and high domestic and external security risks. Also, Pakistan’s forex reserves dipped to its lowest since April 2014 of just $5.8bn, just sufficient to cover one month of imports, further affecting its external position.

Pakistan’s dollar bonds were trading flat at ~35-40 cents on the dollar.

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