Economy; Moody’s upgrades Pak foreign currency bond outlook to ‘Positive’: Moody’s, in its latest rating review, upgraded Pakistan’s outlook to ‘Positive’ from ‘Stable’, while keeping the credit rati

ng unchanged at Caa1. The move came following the recent IMF review where it asserted Pakistan’s improving external accounts liquidity and outlook, supported by on-track structural reforms. Given relatively healthy economic outlook proxied by low levels of inflation and improving liquidity, an outlook upgrade in a class has a significant and positive spillover effects on local/foreign currency bond yields through declining country risk premium alongside opening up more avenues for unilateral and bilateral funding.

Moody highlighted three key areas for the outlook upgrade: a) better external account position, b) efforts on fiscal consolidation, and c) successful completion of key structural reforms and benchmarks under IMF Extended Fund Facility (EFF) program.

What led the way?…..better external account position: As of latest by Mar’15 foreign exchange (FX) reserves stood at USD 16.27bn up from USD 7.9bn back in Jan-14. This sharp recovery in FX reserves was corroborated by country’s sustainable current account balance and higher influx of foreign flows through a multitude of sources (Eurobond, Sukuk, privatization proceeds and uni/bilateral funding, which helped narrow down net borrowing requirement of the government.

Efforts on fiscal consolidation: The second driver highlighted is government efforts towards ‘fiscal consolidation’. While there is still a substantial effort required to alleviate fiscal worries, sufficient groundwork has been undertaken to ensure a smooth recovery on this front. The government is aiming to reduce the fiscal deficit to ~4.9% of GDP by culmination of FY15, from 5.5% in FY14, which was an improvement from the staggering 8.2% inherited by them in the previous year (when they assumed office). The privatization process in full flow, and upcoming and recent transactions aiding the government in raising funds, as well as Eurobond and Sukuk related inflows, these measures have reduced government’s dependency on the banking sector, with more of banking advances being kicked off towards private sector, which again catalyzes growth for the economy.