At a time when traders have withdrawn billions of rupees from banks on the issue of withholding tax, Moody’s Investors Service has changed the outlook for the Pakistan banking system to stable from negative. The positive outlook shows improvement in economic growth. The government and traders are still negotiating to reach an agreement on the bank transactions as the government has so far showed no leniency to change its decision. However, according to Elena Panayiotou, Moody’s Assistant Vice President, the accommodative monetary policy of the State Bank will hopefully stimulate lending growth during the next one and half year and support the loan performance in banking sector. The rating agency projects the real gross domestic product of the country at 4 percent in the current fiscal year due to higher spending on infrastructure projects. The government wants to overcome energy shortage and execute projects associated with the China-Pakistan Economic Corridor.
According to Panayiotou, the problem loans of the country will decline to around 12 percent at the end of the current fiscal year as compared to 12.4 percent during the previous fiscal year ending June 2015. However, the level of credit risk will remain high as the banks are heavily exposed to the low-rated Pakistan sovereign through holdings of securities and government-related loans. The agency notes that improvement in domestic economy will improve asset quality of banks and earnings will slightly ease over the outlook period due to various contributing factors. Earlier, the market perception of the country’s risk profile had been upgraded to B3 from Caa1 on June, 11 this year. The agency also notes that higher loan volumes and capital gains, which are booked through the sale of government securities, will only partially offset the pressure on profitability. However, it expects that the banks will maintain ample liquidity and will continue to benefit from the large volumes of low-cost and stable customer deposits.
As a matter of fact, the government will have to reach an agreement with the business community if it wants to keep the banking system in running mode. Better economy ensures strong banking system, but if businesses are under pressure, the banking system will fall. Moody’s expects that the banking sector should maintain a strong liquidity buffer with core liquid assets. But this can be only possible when business community will be encouraged to use banking channels for their business transactions. The government had imposed the withholding tax to earn revenue and pave the way for documentation of the economy, but blind decision proved to be disastrous for the whole banking industry in the country.
