Moody’s Investors Service (Moody’s) changed on Thursday the outlook of Pakistan’s banking sector from ‘negative’ to ‘stable’, Business Recorder reported.

“The banks’ solid profitability and stable funding and liquidity provide an adequate buffer to withstand the country’s macroeconomic challenges and political turmoil,” the report.

“We forecast the Pakistani economy will return to modest growth of 2% in 2024 after subdued activity in 2023, and inflation to fall to around 23% from 29% last year,” it said.

But the international rating agency added that high interest rates and inflation would continue to curb private-sector spending and investment. It added that banks were financing the sovereign’s wide fiscal deficits, leaving little space to lend to the real economy.

The agency was of the view that initiatives to deepen financial inclusion and assistance for key sectors would only partly support credit demand.

It noted that Pakistani banks remain “highly exposed” to the government via large holdings of government securities that amount to around half of total banking assets, which links their credit strength to that of the sovereign.

Also, read this

Race for new finance minister heats up ahead of IMF negotiations

Hubco forecasts power demand will fall in 2024

Institutions no longer needed should either be shut down or merged: PM Shehbaz

“Persistent external pressures against a challenging operating backdrop will weigh slightly on the performance of Pakistani banks’ loan portfolios,” it added.

The agency expected that Pakistani banks’ modest capital ratios to remain stable. “Banks’ stable deposit-based funding will continue to support financial stability.”

Moody’s gives a baseline credit assessment of Caa3 to the National Bank of Pakistan, HBL, UBL, MCB and Allied Bank Limited.