Low foreign exchange reserves to cope with balance of payment pressures raise external vulnerability risks in Pakistan (B3 negative) and drove Moody's change in the rating outlook in June to negative from stable. Moody's maintained foreign exchange reserves are low and gross borrowing requirements are large in Pakistan and Sri Lanka, threatening the ability of these governments to refinance debt and fund deficits affordably.
Foreign exchange reserves have declined owing to persistent current account deficits, which have widened over the past two years. "Our external vulnerability indicator (EVI) reading for both the countries exceeds 160% for 2019, indicating that total public and private external debt due over the next year is larger than foreign exchange reserves," maintained the report.
The reserves coverage of imports has also fallen, particularly in Pakistan where reserves are now worth less than two months of goods and services imports. Tighter global funding conditions resulting in higher credit risk premia and/or domestic interest rates would quickly transmit to the government finances - where debt affordability is already weak - owing to large gross borrowing requirements.
Moody's Investors Service further maintained that its outlook for sovereign creditworthiness in Asia Pacific (APAC) in 2019 is stable overall, reflecting its expectations for the fundamental credit conditions that will drive sovereign credit over the next 12-18 months.
Solid domestic fundamentals, including rising incomes and competitiveness, generally ample foreign exchange reserves and often sizeable domestic savings, will continue to underpin government credit quality. However, growth is slowing and further downside risks have intensified. Risks stem from tensions between the US (AAA stable) and China (A1 stable), tightening global financing conditions and shifting political and policy priorities domestically.
It further states that a weaker economic outlook means that the window for addressing credit challenges is closing.
In the report, Moody's baseline projections take into account all implemented and planned trade and investment barriers between the US and China. Over 2019, Moody's expects that relations between these two countries will swing between conflict and compromise, involving trade, investment, technology and geopolitics. Moody's expects the pace of economic expansion in APAC to soften in 2019-20, but remain robust.
Asia's emerging and frontier market economies are likely to experience the sharpest deceleration in 2019, with likely median GDP growth rates of 5.5% and 5.2% respectively, weaker than Moody's estimates for 2018.