Moody’s Revises GDP Forecast for Pakistan From 2.9% to 2 – 2.5% for 2020


Moody’s Investors Service has revised downward the Gross Domestic Product (GDP) forecast for Pakistan from 2.9 percent to 2 – 2.5 percent for 2020.

“We expect Pakistan’s real GDP growth to slow to 2 percent-2.5 percent for fiscal 2020 (which ends 30 June 2020), lower than our earlier forecast of 2.9 percent, reflecting the impact of the coronavirus pandemic”, said Moody’s in its latest report on Pakistan.

Consumption of services, which has underpinned growth in recent years, will be adversely affected by the movement restrictions. The textile sector, the country’s key manufacturing sector which accounts for around 60 percent of exports, has also been hit by supply-chain disruptions and a decline or postponement of orders. Manufacturing loans (mainly to the textile and food sectors) accounted for 62 percent of private-sector loans as of 29 February 2020, maintained in the report.

The policy rate reduction to 11 percent follows a 75-basis-point cut on 17 March and will help maintain credit growth, which we expect will remain below nominal GDP growth.

Moody’s further stated that Pakistani central bank’s measures will soften coronavirus’ effects on banks.

On 26 March, the State Bank of Pakistan (SBP) cut its policy rate 150 basis points to 11 percent, reduced banks’ capital conservation buffers (CCB) by 100 basis points to 1.5 percent, relaxed terms for new and existing loans and announced other forbearance measures to increase banks’ cushion against the economic effects of coronavirus.

“We expect the measures to mitigate banks’ asset-quality deterioration amid less business generation and loan growth in an economic slowdown”, maintained the report.

Additionally, the Pakistani banks’ Moody’s ratings are as follows:

  • Habib Bank Limited (B3 stable, caa11),
  • National Bank of Pakistan (B3 stable, caa1),
  • United Bank Ltd. (B3 stable, b3),
  • MCB Bank Limited (B3 stable, b3)
  • Allied Bank Limited (B3 stable, b3) –

Moody’s noted that they can benefit from high or very high levels of government support, which will shield their credit profiles from impairment of their standalone credit assessments.

Lower interest rates on loans will also improve borrowers’ repayment capacity. However, the lower rates will reduce net interest margins and diminish banks’ earnings.

Reducing the capital conservation buffer to 1.5 percent will free up Rs. 800 billion of capital, or 10 percent of outstanding loans, according to the SBP’s estimate. The lower CCB will support banks’ lending activities, but creates potential asset-quality pressure, noted Moody’s.

SBP has offered cash-flow relief through loan refinancing schemes and loan payment holidays to borrowers such as exporters and manufacturers affected by the coronavirus disruptions.

The central bank is allowing delayed principal payments (but not interest) for up to one year at the discretion of the lender, but the application for the delays must be by 30 June 2020.

The grace period lowers the risk of asset impairment and supports the value of securitized assets over the longer term. The central bank is allowing banks to classify restructured loans as performing unless the borrower has taken no action for 180 days after the originally scheduled payment date.

It has also postponed for two months until 30 August 2020 the preparation of pro forma accounts based on the International Financial Reporting Standard No. 9, requiring full implementation by 1 January 2021. The delay supports capital ratios that would be adversely affected by higher provisions if IFRS9 was to have taken effect earlier.

Moody’s stated that these measures will hide risks that, if prolonged, will reduce the transparency of loan underwriting and asset quality.

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