Moody’s improves Pakistan outlook

Moody's has revised the outlook on Pakistan's foreign currency rating to Stable from Negative, with the move occurring post a "stabilization in the country's external liquidity position." This does not come as completely unexpected. Pakistan's total foreign exchange reserves have risen to a 2-year high of US$14.6 billion and exchange rate parity also improved by 6.7 percent CYTD against US Dollar.

With the outlook change having the potential to act as a self-fulfilling prophecy, analysts expect further improvement in rating. This should facilitate the valuation rerating process where the KSE-100 Index still trades at a forward P/E of 8.0x, at a discount of 18% to its average 7-year P/E multiple of 9.4x.  Pakistan’s leading brokerage house AKD Securities forecast June'15 Index target at 35,000 points.
The rationale to revise the outlook is "primarily based on stabilization in the country's external liquidity position supported by the GoP's strong commitment to reforms under an ongoing program with the IMF."

In the near-term, this vote of confidence from Moody's may encourage State Bank of Pakistan (SBP) to lower discount rate, although analysts still maintain that the central bank may choose to follow a cautious approach keeping in view geopolitical risks to international crude oil prices.

After offering a muted 0.18% return, the KSE-100 Index gained 1.32% on Monday after news came that Moody's has raised the outlook for Pakistan's foreign currency rating. This underpins the view that the valuation rerating process has room for further improvement and prospects for medium-term triggers such as a credit ratings upgrade and upgrade to MSCI Emerging Markets have improved.