Global credit rating agency Moody’s has upgraded Pakistan’s banking sector outlook from stable to positive, citing resilient financial performance and improving macroeconomic conditions after the challenges faced in the previous year. The rating agency’s latest assessment reflects optimism about Pakistan’s banking sector, which has shown signs of recovery amid the country’s economic stabilization efforts.
Moody’s noted that Pakistan’s banks have substantial exposure to government securities, holding approximately 50% of their total assets in sovereign debt. This exposure is closely tied to the government’s fiscal health, and the sector’s improved outlook aligns with a positive trajectory for the country’s overall credit rating. The credit agency highlighted that banks’ liquidity has improved, and external financing conditions have become more favorable, contributing to the sector’s positive outlook.
While the upgrade is a positive development, Moody’s has also issued a cautionary note regarding Pakistan’s long-term debt sustainability. The agency emphasized that the country’s fiscal position remains weak, and its external vulnerabilities continue to pose significant risks. Despite this, the agency remains optimistic about the banking sector’s short-term performance as the broader economy stabilizes.
Moody’s projections for Pakistan’s economic growth are more favorable than in recent years. The agency forecasts the country’s GDP will grow by 3% in 2025, an improvement compared to 2.5% in 2024 and a contraction of -0.2% in 2023. Inflation is also expected to decline sharply, dropping to 8% in 2025 from an average of 23% in 2024. This reduction in inflation is expected to contribute to economic stability, making the environment more conducive to investment and business activity.
The report also highlighted that the rate of problem loan formation is expected to slow as inflation and borrowing costs decrease. However, the decline in interest rates could put pressure on net interest margins. Despite this, Moody’s expects Pakistan’s banks to maintain strong capital buffers, supported by moderate loan growth and solid cash generation, even as dividend payouts remain relatively high.
A key factor in Pakistan’s economic stabilization has been the approval of a $7 billion, 37-month IMF Extended Fund Facility in September 2024. This funding package is expected to provide Pakistan with a reliable external financing source over the next few years, bolstering investor confidence and supporting the country’s fiscal management.
Moody’s also projects further improvement in Pakistan’s economic conditions, with GDP growth expected to rise to 4% by 2026. This growth is anticipated to be driven by the reduction in interest rates, which have been cut by 10 percentage points since June 2024. Lower inflation and interest rates are expected to encourage private-sector spending and investment, which will further stimulate economic activity.
Despite these positive developments, Moody’s flagged the high exposure of Pakistan’s banks to government securities as a key asset risk. These securities accounted for 55% of total banking assets as of September 2024, making the sector vulnerable to changes in the government’s fiscal health. Additionally, problem loans have risen to 8.4% of total loans, although the overall lending sector represents just 23% of total banking assets, limiting the potential impact of loan deterioration.
With the removal of the Advance-to-Deposit Ratio (ADR) tax in 2025, Moody’s expects less pressure on banks to expand financing, especially given that demand for loans is expected to remain moderate, even with lower borrowing costs. However, the rating agency also pointed out that Pakistan’s interest costs will account for nearly 40% of the government’s total spending in 2025, a sharp increase from 25% in 2021, highlighting the ongoing fiscal challenges the country faces despite its improving economic indicators.
Overall, the upgrade in Pakistan’s banking sector outlook from Moody’s is a positive sign of the country’s economic recovery, though challenges remain. As Pakistan’s economy stabilizes, the performance of the banking sector will continue to play a pivotal role in the country’s overall economic growth and financial stability.