Moody’s Pakistan Upgrade to Caa1 (Stable): Key Data & Risks

Written by Haider Saleem
Journalist and Political Analyst | LinkedIn / X

On 13 August 2025, Moody’s upgraded Pakistan’s sovereign credit rating to Caa1 from Caa2 and set the outlook to stable. The decision cites an improving external position supported by IMF-programme progress and higher reserves, while noting that debt affordability remains among the weakest in Moody’s rated universe. This article covers:

(1)    what changed and why;

(2)    the key data behind the move;

(3)    the risks that still concern rating agencies;

(4)    market and policy context;

(5)    investor takeaways for beginners (with a light halal lens); and

(6)    the bottom line.

Data as of: 13 Aug 2025 (rating action); 25 Jul 2025 (reserves); 30 Jul 2025 (policy rate); 15 Sep 2025 (next MPC).

1) What changed – and why

Moody’s raised Pakistan’s local- and foreign-currency issuer ratings and senior unsecured debt ratings to Caa1 and assigned a stable outlook.

In plain English: the rating remains in a very high-risk band, but the direction of travel has improved as external buffers strengthen under IMF oversight.

Moody’s also raised Pakistan’s “country ceilings” to:

1.       B2 for local-currency; and

2.       Caa1 for foreign-currency.

Think of these ceilings as the upper limit most Pakistan-based issuers can be rated, because of risks around moving money across borders and converting rupees into foreign currency.

Moody’s also upgraded the Pakistan Global Sukuk Programme Co. Ltd (the vehicle the government uses to issue Shariah-compliant bonds (sukuk) in foreign currency.) rating to match the sovereign and set its outlook to stable.

For context, Fitch and S&P upgraded Pakistan earlier in 2025; Moody’s move follows those changes rather than signalling a low-risk profile. On Moody’s long-term scale, Caa1 sits one notch above Caa2 and below B3 – still speculative and high risk.

2) The data behind the move

• Reserves –  Foreign-exchange reserves rose to $14.3bn as of 25 July 2025, roughly 10 weeks of imports, up from $9.4bn at the last Moody’s review in August 2024.
• External financing needs – Moody’s estimates $24–25bn in FY2026 (Pakistan’s fiscal year runs July–June) and a similar amount in FY2027.
• Programme momentum – Pakistan met external debt obligations in FY2025 and progressed IMF reviews, helping unlock official inflows that supported the reserve build-up.

These datapoints underpin Moody’s view that near-term capacity to meet obligations has improved, conditional on continued reform delivery and timely official financing.

3) What still worries rating agencies

Moody’s flags a few things:

·        Debt affordability as a key weakness alongside governance and political uncertainty.
·        Interest costs still absorb a large share of revenue, leaving little room for shocks.
·        The agency also highlights reliance on IMF engagement and official financing, warning that reform slippage could re-weaken the external position.

What could move the rating next (in brief):

• Upside – faster improvement in the external profile and debt-service burden than currently expected.
• Downside – delays in reform implementation that slow or jeopardise external financing and weaken buffers.

4) Market and policy context

Bonds

Pakistan’s international dollar bonds rose to roughly 90–100 cents on the dollar on upgrade day – their highest since early 2022 – as investors marked down near-term default risk. Prices remain volatile, but the immediate reaction underscores improved sentiment from the crisis lows. (13 Aug 2025)

Policy rate:

The policy rate was 11% as of 30 July 2025, when the State Bank of Pakistan kept rates unchanged, citing a deteriorated inflation outlook from rising energy prices. The next decision is due on 15 September 2025. The finance minister added – as his view – that there could be room for cuts toward year-end if conditions allow; the final decision rests with the central bank.

Domestic coverage

Local outlets welcomed the upgrade as a sign that policies are “moving in the right direction”, while editorials stressed the need for political stability to sustain progress. (14 Aug 2025)

5) Investor takeaways for beginners

a) Equities

A sovereign upgrade can lower a country risk premium, aiding valuations via cheaper capital and improved sentiment. It does not automatically lift earnings.

Fundamentals still lead: pricing power, cost control, FX exposure, and governance. Exporters or IT services with US-dollar (USD) revenues may benefit differently than domestic rate-sensitive firms. (Framework, not a rule.)

b) Sukuk and fixed income

Moody’s also upgraded the backed foreign-currency senior unsecured rating of the Pakistan Global Sukuk Programme Co. Ltd and set its outlook to stable – an explicit link between sovereign risk and Islamic capital-market instruments.

If stability holds, corporate sukuk funding costs can decline over time as sovereign spreads compress, though credit selection and structure screening still matter.

c) FX and inflation lens

Higher reserves and official financing can reduce FX volatility and import-price pressure, supporting disinflation. However, large gross external needs ($24–25bn p.a.) keep the outlook sensitive to IMF reviews, energy pricing, and commodity shocks.

6) Bottom line

The move to Caa1 (stable) recognises progress—stronger reserves, programme momentum, and a better financing mix – yet Pakistan remains in a high-risk tier. For long-term investors, the signal is directionally positive, but contingent: durable policy delivery and predictable financing will determine whether today’s gains translate into lower macro volatility and more investable opportunities over time. (Peer context on this tier includes Sri Lanka, Egypt and Tunisia.)

Footnotes

1. Reuters – “Moody’s upgrades Pakistan’s credit rating to ‘Caa1’; finance minister hopes for rate cut,” 13 Aug 2025 (upgrade, bonds at ~90–100c; policy-rate timing and rationale).
2. Bloomberg – “Moody’s Upgrades Pakistan Rating as Financial Conditions Improve,” 13 Aug 2025 (external needs; upside/downside risks; peer context).
3. Dawn (Business) – “Moody’s upgrades Pakistan’s credit rating to Caa1 based on ‘improving external position’,” 13–15 Aug 2025 (reserves; country ceilings; Sukuk programme; rating-scale context).
4. BBC Monitoring – “Pakistan media highlights,” 14 Aug 2025 (domestic coverage; emphasis on political stability).

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