Fitch Assigns Recovery Rating for Pakistan, Keeps B- Outlook 2026. Why did Fitch keep Pakistan’s debt outlook at B- while assigning a new recovery rating?
In its latest assessment, Fitch Ratings reaffirmed Pakistan’s long-term foreign-currency rating and introduced recovery assumptions that shape how investors view default risk and debt sustainability.
Fitch Affirms Pakistan’s Debt Rating at B-
Fitch Ratings has affirmed Pakistan’s long-term foreign-currency Issuer Default Rating (IDR) at B- and assigned a Recovery Rating of RR4. This decision followed the removal of Pakistan’s ratings from Under Criteria Observation (UCO) after the agency implemented its new Sovereign Rating Criteria.
The updated criteria, effective from September 2025, incorporate sovereign recovery expectations into debt ratings for the first time. This marks a structural shift in how sovereign credit risk is assessed.
What Does Recovery Rating RR4 Mean for Pakistan?
A Recovery Rating of RR4 indicates average recovery prospects for investors if a sovereign default occurs.
In simple terms, bondholders could expect moderate recovery, not full repayment, in a restructuring scenario.
Key Implications of RR4
- Reflects high public debt levels
- Signals heavy interest payment burden
- Accounts for limited fiscal flexibility
- Aligns debt ratings with Pakistan’s sovereign IDR
Debt Instruments Covered in Fitch’s Decision
Fitch equalised the ratings of:
- Pakistan’s senior unsecured long-term debt
- Debt issued by Pakistan Global Sukuk Programme Company Limited
Both instruments are aligned with Pakistan’s Long-Term Foreign-Currency IDR, reflecting consistent recovery expectations.
Why Fitch Maintained a Stable Outlook
On 15 April 2025, Fitch upgraded Pakistan’s foreign-currency IDR from CCC+ to B- with a Stable Outlook.
The stable outlook remains intact due to gradual improvements in macro-economic management under reform commitments.
Core Reasons Behind the Stable Outlook
- Continued fiscal adjustment
- External financing support
- Policy discipline under IMF oversight
Role of IMF Programme in Rating Stability
Pakistan’s credit profile remains closely tied to its engagement with the International Monetary Fund.
Delays in IMF reviews or deviation from agreed reforms could negatively impact:
- External liquidity
- Foreign exchange reserves
- Investor confidence
ESG Factors Influencing Pakistan’s Credit Rating
Fitch highlighted Environmental, Social, and Governance (ESG) risks as key rating drivers.
Governance Challenges
Pakistan received an ESG Relevance Score of 5 for:
- Political stability and rights
- Rule of law
- Institutional quality
- Control of corruption
These scores reflect the heavy weight assigned to World Bank Governance Indicators (WBGI) in Fitch’s sovereign model.
Pakistan’s WBGI Ranking: 22nd percentile globally
Rating Sensitivities: What Could Trigger a Downgrade?
Fitch outlined clear risk factors that could pressure Pakistan’s rating.
Negative Rating Triggers
- Rising government debt ratios
- Failure to control debt-servicing costs
- Deterioration in external liquidity
- Delays in IMF programme reviews
- Weak fiscal discipline
What Could Lead to a Rating Upgrade?
Positive momentum remains possible if reforms stay on track.
Positive Rating Triggers
- Sustained decline in public debt
- Stronger tax revenue generation
- Successful fiscal consolidation
- Growth in foreign-currency reserves
- Improved access to external financing
How Markets May React to Fitch’s Decision
For investors, Fitch’s decision sends a mixed but stabilising signal:
- No immediate downgrade risk
- Default risk remains elevated but manageable
- Recovery prospects now clearly priced in
This clarity may help bond markets, sukuk investors, and lenders better assess Pakistan’s sovereign risk.
Quick Snapshot: Fitch Rating Summary
| Factor | Status |
|---|---|
| Long-Term Foreign-Currency IDR | B- |
| Outlook | Stable |
| Recovery Rating | RR4 |
| Governance ESG Score | 5 |
| IMF Dependence | High |
Why This Rating Matters for Pakistan’s Economy
Credit ratings directly affect:
- External borrowing costs
- Investor sentiment
- Access to global capital markets
- Currency stability
Maintaining the B- rating helps Pakistan avoid sudden financing shocks while reforms continue.
FAQs – Fitch Rating for Pakistan
What is Pakistan’s current Fitch rating?
Pakistan’s long-term foreign-currency IDR is B- with a Stable Outlook.
What does Recovery Rating RR4 mean?
It indicates average recovery prospects for investors in case of default.
Can Pakistan’s rating improve in 2026?
Yes, if debt declines, reserves grow, and IMF reforms stay on track.
What could cause a downgrade?
Rising debt, weak external liquidity, or IMF programme delays.
Conclusion
The decision by Fitch Ratings to assign a Recovery Rating of RR4 while keeping Pakistan’s debt outlook at B- reflects a cautious but stable view of the country’s credit risk. While challenges remain, sustained fiscal discipline and IMF-backed reforms could gradually improve Pakistan’s sovereign standing.
