According to Moody’s Investors Services, Pakistan would witness a marked weakening in debt metrics because of the increasing borrowing needs that raise interest payments when borrowing costs rise, and narrow revenue bases that push fiscal deficits wider when interest payments rise.
Moody’s released its latest report named “Low-rated sovereigns with large external repayments vulnerable to contagion shocks” that states, “the central bank in Pakistan has delivered sizeable rate cuts amounting to 225 basis points in March, but this cut may not sufficiently offset the tightening in financing conditions related to local-currency depreciation.”
The countries that would face a marked weakening in debt metrics include:
- Sri Lanka;
- Pakistan (B3 stable);
- Egypt (B2 stable).
The report further stated that the central banks in Egypt and Pakistan have delivered sizeable rate cuts amounting to 300 basis points and 225 basis points in March whereas, Sri Lanka’s central bank cut its policy rate by 50 basis points earlier in the year. It shows that these cuts may not sufficiently offset the tightening in financing conditions related to local-currency depreciation.
Given stretched fiscal positions, the governments facing the largest potential deterioration in debt dynamics may also find it challenging to raise additional financing to mitigate the economic slowdown, which may compound the weak investor sentiment and spark further capital outflows.