Although the three agencies are equally reputable, S&P had been somewhat more reticent in its ratings. Watching S&P for a long time, especially during its last upgrade of rating, one feels a great deal of pain in getting downgraded for two reasons.
First, the rating of 'B' was awarded by S&P in October 2016. Previously, it had maintained a 'B-' rating since August 2009. Until the end of fiscal year 2012-13, the economic conditions continued to deteriorate and hence there was no basis for arguing for a rating upgrade. After Pakistan entered the IMF program in July 2013 and started achieving program targets, an earnest effort was expended to make a case for rating up-grade from both Moody's and S&P. (Fitch rating started in September 2015). Moody's was lot more receptive as it improved its outlook component of 'CCCa' rating from 'negative' to 'stable' and 'positive' soon after the start of program and performance therein. It finally upgraded the rating to 'B3' in June 2015. On the other hand, S&P was not impressed by remarkable gains under the program and economic stability achieved throughout the period 2013-16 and maintained its 'B-' rating that it had assigned under rather stressful times of 2009. It finally relented by upgrading Pakistan from 'B-' to 'B' on 31 October 2016, after the IMF program was successfully concluded in September 2016. A rating that we earned with such hard work has been lost in less than two and half years.
Second, it is sad to read through the poor assessment S&P has made of the state of our economy. "We are lowering our long-term sovereign credit rating on Pakistan to 'B-' from 'B' on the diminished growth prospects as well as elevated external and fiscal stresses," the rating agency said on the occasion. The downgrade is therefore a verdict that growth prospects have receded and the risks facing the economy have increased.
What is more concerning is its assessment that "with the weaker economic settings, and limited progress in addressing fiscal imbalances following elections in mid-2018, we believe prospects for a rapid recovery in fiscal and external settings are now diminished. Negotiations with the International Monetary Fund (IMF) have taken longer than anticipated, and we now believe the reform timeline will be more protracted in nature."
This statement has encapsulated a number of issues that are dodging the policymakers. Let us discern these messages. One, the 'weaker economic settings' is a reference to difficult economic conditions the government inherited from the previous dispensation. This is obviously well acknowledged and attributable to past managers. Two, the 'limited progress in addressing fiscal imbalances following elections' is an unmistakable signal that the new managers have not done what it would take to meet the challenges of economic stabilization. This is the view of neutral observer and must be weighed as such. Three, 'prospects for a rapid recovery in fiscal and external settings are now diminished' is a declaration that things are not going to improve anytime soon. This essentially means the imbalances have worsened to a point that rapid recovery is impossible. Four, 'Negotiations with the International Monetary Fund (IMF) have taken longer than anticipated' is actually a reference to continued failure to finalize a program with the IMF. Without this program, it is difficult to imagine anybody would trust reforms and stabilization measures. Six, the agency has summed up its assessment by saying 'we now believe the reform timeline will be more protracted in nature'. Here again, S&P has opined that Pakistan would be unable to recover from this crisis any time soon.
In the context of recent 'mini-budget', while acknowledging that it would be helpful to investors, the agency has said that "we believe that additional measures would be necessary in order to bring about a more meaningful decline in the fiscal deficit." The agency has concluded the assessment by stating: "relative to our previous expectations, we now believe prospects for a broader stabilization of Pakistan's credit metrics have diminished".
What effects would result from rating downgrade by the three agencies? At least three effects are noteworthy. First, there is a general loss of reputation as Pakistan would lose its standing among comity of nations for being a risk destination for economic engagements. Second, there would be an increase in cost of borrowing, as decline in rating signals higher risks and hence demand for additional premium to offset the increased risk. Finally, the foreign investors would also demand, at the margin, a higher risk premium in their return for investments. Pakistan would soon be approaching international capital market, per force, to re-finance the two maturing bonds, namely a Euro Bond and Sukuk, each for $500 million. The prospects for a successful re-financing drive launch would be affected for lack of Fund program as well as due to the lower rating.
This, then, is the sum total of S&P's assessment of Pakistan. It is not possible to take exception to this assessment. Many analysts have been writing along these lines now for quite some time. On the other hand, there is an eerie silence among policymakers regarding the future course of economic policy. No timeline has been specified as to when a decisive program would be in place. At present, the entire dependence is on friendly support which is acting as a palliative without treating the underlying malaise. This is not a happy situation and needs immediate and somewhat radical effort to correct this state of the economy.