Pakistan Global Sukuk Programme Co Ltd (The) -- Moody's assigns B3 rating to Pakistan's sukuk offering

Rating Action: Moody's assigns B3 rating to Pakistan's sukuk offeringGlobal Credit Research - 18 Jan 2022Singapore, January 18, 2022 -- Moody's Investors Service ("Moody's") has today assigned a B3 backed senior unsecured rating to the proposed US dollar-denominated trust certificates (sukuk) issuance by the Government of Pakistan through The Pakistan Global Sukuk Programme Company Limited ("the Company"), a special purpose vehicle, which is wholly-owned by the Government of Pakistan and whose debt and trust certificate issuances are, in Moody's view, ultimately the obligation of the Government of Pakistan.The assigned rating to the sukuk mirrors the Government of Pakistan's current issuer rating. According to the terms and conditions available to Moody's, the trust certificates will constitute direct, unconditional and unsubordinated obligations of the Government of Pakistan. In Moody's opinion, the payment obligations represented by the securities to be issued by the Company rank pari passu with all of the Government of Pakistan's current and future senior unsecured external debt.Proceeds from the sukuk issuance will be used by the Company to purchase assets from the National Highway Authority. The amounts subsequently received by the Government of Pakistan in consideration for the transaction will be used for general budgetary purposes.Moody's notes that its sukuk ratings do not express an opinion on the structure's compliance with Shari'ah law.RATINGS RATIONALEPakistan's B3 issuer rating is underpinned by its relatively large economy and robust long-term growth potential, as well as ongoing reforms that may strengthen policy effectiveness over time. Credit challenges include structural constraints to export competitiveness, the government's high debt burden and a narrow revenue base that reduces fiscal flexibility and weakens debt affordability, as well as political risks that can influence the reform trajectory.ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONSPakistan's ESG Credit Impact Score is Highly Negative (CIS-4), reflecting its high exposure to environmental and social risks, as well as its weak governance profile. Relatively weak institutions constrain the government's capacity to address ESG risks.The exposure to environmental risk is Highly Negative (E-4 issuer profile score) because of Pakistan's vulnerability to climate change and the limited supply of clean, fresh and safe water. With varied climates across the nation, Pakistan is significantly exposed to extreme weather events, including tropical cyclones, drought, floods and extreme temperatures. In particular, the magnitude and dispersion of seasonal monsoon rainfall influence the agricultural sector growth and rural household consumption. The agricultural sector accounts for around 20% of GDP and exports, and nearly 40% of total employment. Overall, around 70% of the entire population live in rural areas. As a result, both droughts and floods can create economic, fiscal and social costs for the sovereign.The exposure to social risk is Highly Negative (S-4 issuer profile score), driven primarily by safety concerns that have limited investment and diversification opportunities. Still very low incomes as well as the limited access to quality healthcare, basic services, housing and education, especially in rural areas, are also important social issues. That said, the government is focused on reducing poverty and inequality, strengthening social safety nets, and promoting human capital as key priorities through its expansive "Ehsaas" programme, although effects will take time to materialise and are limited by still weak institutions and governance.The influence of governance is Highly Negative (G-4 issuer profile score). International surveys of various indicators of governance, while showing some early signs of improvement, continue to point to weak rule of law and control of corruption, as well as limited government effectiveness. These weaknesses are balanced against a lengthening track record of effective checks and balances and judicial independence for the level of development in the country, and gradually increasing transparency and dialogue in policymaking.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGUpward pressure on Pakistan's rating would develop if ongoing fiscal reforms were to expand the government's revenue base, raise debt affordability, and lower its debt burden beyond our current expectations. A structural reduction in external vulnerability risks, including though higher levels of foreign exchange reserve adequacy that were sustainable and/or increased economic competitiveness that were to lift export prospects, would also put upward pressure on the rating.Downward pressure on the rating would stem from renewed deterioration in Pakistan's external position, including through a significant widening of the current account deficit and erosion of foreign exchange reserve buffers, which would threaten the government's external repayment capacity and heighten liquidity risks. A continued rise in the government's debt burden, without prospects for stabilisation over the medium term, would also put downward pressure on the rating. In addition, participation in official sector debt relief programmes that raised the probability of private sector participation would likely point to a lower rating, commensurate with the potential losses to be incurred.The principal methodology used in this rating was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Christian de Guzman Senior Vice President/Manager Sovereign Risk Group Moody's Investors Service Singapore Pte. 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