Moody’s Investors Service, one of the leading credit rating agencies in the world, has given the Pakistani banking system a stable outlook for the next 12 to 18 months in a new report released on Thursday.

“The sovereign credit profile has improved in recent months, benefiting the banks through their high exposure to government securities, which account for around 40% of their assets,” said Constantinos Kypreos, Moody’s Senior Vice President, in a press release issued by the agency on Thursday.

The agency noted that economic activity in the country will be supported by the “ongoing infrastructure projects and improvements in power generation and domestic security”. It added that the government’s decision to depreciate the rupee and trade gains may raise private investment from the current low levels in the country.

“Operating conditions for Pakistan banks, although gradually improving, remain difficult amid tight monetary conditions – with the policy rate at 13.25% – and large government borrowing needs crowding out funding for the private sector,” said the Moody’s vice president.

The agency also noted that economic growth will continue to “remain subdued’ but clarified that the exchange rate of the country has stabilised since June 2019. It also stated that markets expect the country’s central bank “to lower policy rates over the next few years”.

“Stable customers’ deposits and high liquidity also remain key strengths, providing banks with ample low-cost funding. Capital levels will remain broadly stable, but Moody’s considers these modest relative to peers. Profits will increase slightly but remain below historical levels,” said the press release.

The agency noted that the government can support the “systematically important banks in case of need”, but clarified that the country’s ability will be limited due to the fiscal challenges it faces. In December last year, Moody’s revised upwards Pakistan’s outlook from ‘Negative’ to ‘Stable’. Moody’s had announced bumping up Pakistan’s outlook rating in a report released on December 2, affirming a B3 rating for the country and confirming that the economy’s future look stable as opposed to negative earlier.