Fitch Ratings has announced an upgrade of the Water and Power Development Authority (Wapda)’s Long-Term Foreign Currency Issuer Default Rating (IDR) to “CCC+” from “CCC”. This upgrade comes in the wake of the recent upgrade of Pakistan’s sovereign rating on July 29, 2024. As Wapda’s ratings are intrinsically tied to those of the sovereign, any changes in the latter directly impact the former.
Fitch Ratings explained that they typically do not assign Outlooks to issuers with a rating of “CCC+” or below due to the high volatility associated with these ratings. The upgrade signifies a slight improvement in the safety margin for Wapda, which remains heavily reliant on government funding. The upgrade reflects Fitch’s rating definition, indicating a low margin of safety but an acknowledgment of the government’s unwavering support for Wapda.
Fitch Ratings highlighted the “Virtually Certain” extraordinary support from the Pakistani government to Wapda in times of need. This maximum support score of 60 is derived from Fitch’s Government-Related Entities (GRE) Rating Criteria. Despite Pakistan’s high funding requirements and weak credit quality, the government’s commitment to Wapda remains strong. Consequently, Fitch derives Wapda’s ratings based on both its rating definitions and the support factors under the GRE criteria.
The senior unsecured bond rating of Wapda is equalized with the entity’s IDR. Fitch noted that factors that could individually or collectively lead to positive rating actions or upgrades include an upgrade of the sovereign rating. Conversely, factors that could lead to negative rating actions or downgrades include a sovereign downgrade or a reduced government responsibility or incentive to provide support.
Wapda, a wholly state-owned hydroelectric power generation company, plays a crucial role in Pakistan’s energy sector. Established to integrate the development of the nation’s water and power resources, Wapda accounted for 88% of Pakistan’s hydroelectric power capacity and 20% of its installed capacity in 2023. This significant contribution underscores the entity’s importance to the national grid and the overall energy infrastructure of Pakistan.
While the upgrade is a positive development, it also highlights the intertwined fate of Wapda and the Pakistani sovereign ratings. The future outlook for Wapda remains contingent on the economic stability and credit quality of Pakistan. As the country navigates its economic challenges, the government’s ability to support Wapda will be crucial in maintaining its rating.
Fitch’s upgrade indicates a vote of confidence in Wapda’s operational and financial health, despite the broader economic difficulties faced by Pakistan. The rating agency’s recognition of the government’s strong support framework is pivotal for Wapda’s sustainability. This backing is essential not only for the ongoing projects but also for future expansions and enhancements of Pakistan’s hydroelectric infrastructure.
Wapda’s focus on hydroelectric power is strategically significant for Pakistan. Hydroelectric power is a renewable and cost-effective energy source, vital for reducing the country’s dependence on fossil fuels and enhancing energy security. Wapda’s projects contribute significantly to the national goal of sustainable energy development, aligning with global trends towards cleaner and more sustainable energy sources.
The upgrade by Fitch Ratings can potentially have broader implications for investor confidence and international perceptions of Pakistan’s economic stability. A higher rating can facilitate better access to international funding and investments, essential for Wapda’s ambitious infrastructure projects. Moreover, it reflects positively on Pakistan’s commitment to supporting critical state-owned enterprises, which is crucial for long-term economic growth and stability.
