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- Moody’s report says positive outlook reflects Pakistan’s improving macroeconomic conditions
- Says Pakistan’s long-term debt sustainability remains key risk with its “very weak” fiscal position
KARACHI: Moody’s, a leading global credit rating, research and risk analysis firm on Wednesday upgraded the Pakistani banking sector’s outlook from stable to “positive,” saying it reflected the country’s improving macroeconomic conditions.
Moody’s Investors Service periodically issues assessment reports to help its clients protect themselves against economic and financial risks.
The assessment comes amid improving macroeconomic conditions in Pakistan, which include inflation slowing to a near-decade low of 1.5 percent in February. Pakistan expects to achieve 3.6 percent economic growth this fiscal year and hopes its foreign exchange reserves increase beyond $13 billion by June.
“Moody’s Ratings has changed the outlook on Pakistan’s banking system to positive from stable to reflect the banks’ resilient financial performance as well as improving macroeconomic conditions from very weak levels a year ago,” the firm said in a statement.
Moody’s said the positive outlook also mirrors the government’s Caa2 positive outlook, which the rating agency issued last August. It said Pakistani banks have had significant exposure to the sovereign through their large holdings of government securities, which account for around half of total banking assets.
However, the firm warned that Pakistan’s long-term debt sustainability remains a key risk with its still “very weak” fiscal position, high liquidity and external vulnerability risks.
“We expect the Pakistani economy to expand by 3 percent in 2025, compared with 2.5 percent in 2024 and -0.2 percent in 2023,” Moody’s said.
It noted that inflation is also significantly easing in the country, which the rating agency said it estimated at around 8 percent for the year 2025 from an average of 23 percent in 2024.
Moody’s said Pakistan’s problem loan formation will also slow as borrowing costs and inflation reduce, although net interest margins will narrow on the back of interest rate cuts.
“Banks will maintain adequate capital buffers, supported by subdued loan growth and solid cash generation, despite dividend payouts remaining high,” it said.
Pakistan has undertaken financial reforms related to its energy and tax sectors and attempted to privatize its loss-making enterprises in line with the IMF’s demands.
Moody’s rating upgrade takes place as a staff mission of the International Monetary Fund (IMF) is in Pakistan to hold its first review of the country’s economic performance under its $7 billion Extended Fund Facility (EFF) program.