PAKISTAN'S CREDIT RATINGS BETTER THAN THE LEVEL OF BANKRUPTCY

KANWAL SALEEM
Oct 13 - 19, 2008

At present, Pakistan's credit rating is little better than the level of bankruptcy and the situation demands some immediate bold steps by the government to help stabilise the national economy to help restore the confidence of both foreign and local investors.

Currently, the country is in severe financial crunch and the Pak rupee is losing its value against dollar with each passing day, whereas foreign exchange reserves are also depleting rapidly. Anticipated foreign assistance from official quarters may not prove sufficient to avert near-term financing problems, while considerable delays in disbursements have already contributed to a greater-than-expected erosion of foreign exchange reserves.

On one side, Pakistan's deteriorating economic indicators are forcing the credit rating agencies to reassess their outlook for the national economy, while capital outflow continues on the other hand. The downgrading of Pakistan rating is further compounding the problems of Pak economy, as it is contributing in restricting the flow of foreign investment on one hand and pushing more pressure on the state of national economy on the other hand.

Moody's Investors Services downgraded Pakistan's bond rating to negative from stable on 23rd September, 2008, saying that the country could face difficulties in repaying its debts. It also lowered the outlook on its B3 foreign currency bank deposit ceiling to negative because of substantial erosion in the country's external liquidity position, and which is not likely to be adequately reversed by prospective external assistance or ongoing efforts at macroeconomic stabilisation.

"It remains unclear how Pakistan would rebuild its external liquidity in the medium-term, unless either considerably larger amounts of foreign assistance were disbursed or foreign investor sentiment improved sharply," the credit rating agency said.

According to Moody's analyst for Pakistan, Aninda Mitra, Pakistan's economy future was not promising. He said he was concerned about arrears on sovereign debt and missed repayments as Pakistan's access to foreign exchange worsened.

Further, Standard & Poor's Ratings Services also lowered its long-term foreign currency sovereign credit rating on the Islamic Republic of Pakistan to 'CCC+' from 'B' and its long-term local currency rating to 'B-' from 'BB-'. At the same time, it also lowered its short-term rating on the sovereign to 'C' from 'B'. The outlook on the long-term rating is negative.

The rating on Pakistan's senior unsecured local currency debt has also been lowered to 'B-' from 'BB-'. The downgrade comes in the wake of continued steep erosion of Pakistan's external liquidity position, the extent and pace of which casts rising doubts about the sovereign's ability to meet approximately US $3 billion of external debt servicing commitments in the coming year.

"Pakistan's balance of payments is under significant and rising pressure, whereby existing structural trade imbalances are magnified by exogenous price shocks," said Standard & Poor's credit analyst. "At the same time, capital inflows, which had in the past covered much of the current account gap, are increasingly deterred by the prolonged political uncertainty and adverse security climate."

Net foreign reserves of the central bank have fallen 67 percent to just US $4.7 billion since October 2007, as the country recorded an overall balance of payments deficit of US $5.7 billion for fiscal year 2008 ended June. For the first two months of fiscal 2009, the overall balance of payment deficit expanded more than six fold year on year to nearly US$2.5 billion, with the current account shortfall reaching 1.6 percent of GDP against a full-year target of 6.0 percent.

Standard & Poor's believes that stabilising Pakistan's external position, and thus avoiding near-term debt service stresses, will require substantial and timely multilateral and bilateral assistance, concurrent with fiscal and monetary policy measures aimed at paring aggregate demand to cut import growth.

It may be recalled that Standard and Poor's (S&P) had also cut its rating to B from B Plus in June and has now a negative outlook on its rating, meaning that another downgrade is on the cards.

Analysts told PAGE that the downgrading of Pakistan's credit rating was neither unexpected nor unjustified though it would prove harmful to the economy of Pakistan in certain ways like sending a negative signal to the foreign investors. Obviously, the balance of short-term and even medium-term economic and external financial risks confronting the national economy has tilted to the downside, prompting a negative outlook.

They said that foreign exchange reserves of the country are now barely enough to cover two months of imports while trade and current account deficits are running well ahead of the target, indicating a bleak external position. While other indicators are also discouraging and high inflation could hold up reforms such as liberalisation, deregulation and privatisation, they viewed.

According to them, the growing tide of religious militancy and extremism has played an added role in undermining our credit rating. The need of the hour is to pay attention to check factors through stringent measures that are giving jolts to national economy.

They further said that overseas investment in Pakistan, which reached a record $5.1 billion in the year to June 2007, has since fallen while the rating cut may further deter overseas investors who have already retreated from the South Asian nation, buying a net $119 million of Pakistani stocks in the 10 months ended April 30, compared with purchases of $1.76 billion a year ago.