ISLAMABAD: Global rating agency Moody’s has said that Pakistan’s macroeconomic situation has improved with banking outlook upgraded from stable to positive, and the country’s economy is set to register a three percent growth.
The global rating agency, in a statement, said “We have changed our 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.”
Moody’s said “The positive outlook on the sector also mirrors the Government of Pakistan’s (Caa2 positive) positive outlook, with Pakistani banks having significant exposure to the sovereign through their large holdings of government securities, which account for around half of total banking assets.
However, Pakistan’s long-term debt sustainability remains a key risk, with its still very weak fiscal position, high liquidity and external vulnerability risks.“
Moody’s further said it expects “the Pakistani economy to expand by 3% in 2025, compared to 2.5% in 2024 and -0.2% in 2023”. “Inflation is also significantly easing, which we estimated at around 8% for 2025 from an average of 23% in 2024.”
The rating agency said that problem loan formation will 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,” Moody’s said and also highlighted that the outlook was changed to positive from stable on account of a better operating environment.
“Pakistan’s economic outlook is improving from very weak levels, with enhanced government liquidity and external positions compared to 2024.”
The rating agency said the sovereign’s 37-month $7 billion IMF Extended Fund Facility approved in September 2024 provides a credible source of external financing for Pakistan for the next few years. “We forecast GDP growth of 3% in 2025 and 4% in 2026, up from 2.5% in 2024, further driven by a 10 percentage point cut in interest rates since the start of the monetary policy easing cycle in June 2024,” it added.
Moody’s said “We expect inflation to slow sharply to around 8% in 2025, from an average of 23.4% in 2024. We expect that lower inflation and policy rate cuts will spur private-sector spending and investment in Pakistan from current low levels.”
The rating agency said that high exposure to government securities raises asset risk. “As of September 2024, government securities accounted for 55% of banks’ total assets. This significant exposure links banks’ credit strength to that of the sovereign, which is improving from very weak levels.
Although problem loans have deteriorated to 8.4% of total loans as of September 2024 from 7.6% in the prior year, overall loans account for only 23% of banks’ total assets,“ it added. The Moody’s report was of the view that with the removal of ADR tax for 2025, “we expect lower pressure on banks to increase financing, while demand remains relatively subdued despite lower borrowing costs”.
