Moody’s has cautioned that social risks in Pakistan are likely to increase due to the conditions associated with new multilateral financing. The agency projects that interest payments in Pakistan will account for nearly 40 percent of total expenditures by 2025, up from about 25 percent in 2021.
In its report titled “2025 Outlook – Stable as Economic Risks Recede, Geopolitical and Trade Risks Persist,” Moody’s noted that Pakistan has recently agreed to a new $7 billion program with the International Monetary Fund (IMF) to help alleviate liquidity issues.
However, financing from concessional lenders may not fully cover the maturing debt of sovereigns. Additionally, fulfilling the conditions of new multilateral financing can be challenging and may heighten social risks.
The report indicated that government debt affordability in Pakistan will remain weaker than it was prior to the pandemic. Among countries in the Asia-Pacific region, Pakistan is particularly susceptible to food security crises. Overall, government debt affordability in emerging and frontier markets is expected to stay lower than before the pandemic, especially in Pakistan (Caa2 positive), Nigeria (Caa1 positive), and Egypt.
Several sovereign nations will face eurobond redemptions exceeding 10 percent of their available international reserves in 2025, including Bahrain (B2 stable) and Tunisia. Many sovereigns will also have significant local currency financing needs, with gross domestic financing requirements surpassing 10 percent of GDP in both Pakistan and Zambia (Caa2 stable), even post-default. Consequently, liquidity risks in both local and foreign currencies will remain a major factor in potential defaults.
In advanced economies, median debt affordability is projected to be stronger in 2025 compared to pre-pandemic levels, although some gains may be diminished. Greece is an exception, as it is expected to see continued improvements in debt affordability due to deleveraging. Conversely, debt affordability in the US and France is anticipated to decline significantly.
Moody’s also pointed out that geopolitical tensions are contributing to an increase in global military spending. Years of underinvestment and the rising threat from Russia have led many European governments to boost defense budgets to meet NATO’s target of at least 2 percent of GDP. Japan’s Defense Capability Buildup Program is expected to consume an increasingly large portion of its budget in 2025, while India’s defense spending is also projected to rise sharply amid ongoing tensions with China and Pakistan.
