Fitch Ratings Inc. upgraded Pakistan on an improving funding environment following its initial loan deal with the International Monetary Fund last month.
“The upgrade reflects Pakistan’s improved external liquidity and funding conditions,” analysts led by Krisjanis Krustins wrote in a note. They expect approval for staff-level agreement by the multilateral lender in July, helping unlock funds from bilateral creditors and other sources.
The nation’s key stock index rose 1.1% to the highest in 13 months at 12:05 a.m. local time while dollar bonds advanced. Pakistan’s rupee fell by 0.4% to 281 a dollar, according to Arif Habib Ltd.
The upgrade by one notch to CCC long-term foreign currency issuer rating comes after two downgrades in the past year and still denotes a very high level of default risk for the troubled South Asian economy. Pakistan faces some $23 billion of external debt obligations coming due in the fiscal year starting July — more than five times the nation’s foreign-exchange reserves.
Upcoming elections due in October cast some doubt over whether promises to fulfill the IMF’s policy prescriptions will be fulfilled.
“Program implementation and external funding risks remain due to a volatile political climate and large external financing requirement,” the analysts said.
Pakistan’s 8.25% 2024 dollar bond was indicated gaining 0.8 cents to 76.4 cents on the dollar Tuesday, while the 7.375% 2031 bond was indicated advancing one cent to 44.6 cents on the dollar.
Read: Bonds on the Brink Reward EM Investors With Double-Digit Returns
The IMF funding prospects dramatically reduced bond investor’s perception of Pakistan’s near-term default risk, powering gains of about 60% in two weeks to July 5. The lending arrangement is key for the nation to deal with external debt and import payments.
The authorities expect $25 billion in external financing against $15 billion in public debt maturities, said Fitch. Bilateral funding of $9 billion maturing deposits from China, Saudi Arabia and the UAE will likely be rolled over just like the past year, said Fitch. Saudi Arabia deposited a new loan of $2 billion, Pakistan’s finance minister Ishaq Dar said in a televised speech.
Pakistan’s bonds were the biggest losers in emerging markets Friday as investors tempered their recent exuberance following a statement from the IMF’s resident representative in Pakistan on meeting with the country’s main political parties.
The rating also reflects low foreign exchange reserves and a wide fiscal deficit, Fitch said. Increasing likelihood of default or indications that the authorities are considering debt restructuring could lead to a negative rating action, it said.
(Updates with details throughout.)