According to Moody’s Investors Service, the outlook Pakistan’s financial sector will remain B3 (stable) for the next one and half years due to accelerated economic progress, stable funding, large holdings of low-rated government bonds by banks, modest capital levels and high asset risks. However, despite positive indicators from various sectors, the economy will remains susceptible to political instability while risk of deterioration in domestic security is also there. The rating agency has specifically mentioned the Chinese-funded infrastructure projects as the driving force behind the economic growth which will be supported by domestic demand. The infrastructure projects could stimulate lending and help improve asset quality. Constantinos Kypreos, Moody’s Senior Vice President, opines the banks’ profitability will remain flat and stable funding from customer deposits and high liquidity levels would show further strengths despite margin pressure. But the large holdings of low-rated government bonds would be the biggest challenge for the country’s banks. Another analyst believes the modest capital levels and high asset risks would be additional risks. Moody’s assessment of the stable outlook is based on five drivers, which include operating environment, asset risk and capital, profitability and efficiency, funding and liquidity and the government support. On the overall outlook of the economy, Moody’s puts the real GDP growth at 5.5 percent for 2018 and 5.6 percent for 2019.
With regard to investment in infrastructure projects, the solid domestic demand will be the main driver of economic growth, which will fuel lending growth by 12 to 15 percent for 2018. The rating agency expects the asset quality will be improved during the current macroeconomic environment and will be supported by diversified loan portfolios and low corporate debt of the banks. However, the asset risk would remain high due to frailty of legal framework, inefficient foreclosure processes and lack of information to assess the situation. The low-rated government securities would continue to expose risks in the banking sector. As a matter of fact, the international rating agencies have their own aims and objectives to assess economies of various countries, including Pakistan. Where there is little need to take their assessments seriously, there is also need to carefully understand the risks factors mentioned by them in their reports. Pakistan is an emerging economy and all indicators are in its favour. Looking into the real situation on the ground, it appears the government is the biggest hurdle in the development of the economy. Every government department shows maximum hostility to individual entrepreneurs from beginning to the end.
