TARIQ AHMED SAEEDI - tariqsaeedi@hotmail.com
Oct 13 - 19, 2008

While Standard and Poor's appraisal of liquidity of sovereign entities is driven by creditability of analyses, recent examples in global financial market shows that stocks rated defaulted by rating agencies amazingly rebounded to their liquid positions to have betrayed errs in assessment process. Sceptics world over go a point further seeing in dubiety creditworthiness of rating by raising question over its objectivity.

More recently, S&P's has lowered foreign currency credit rating of Pakistan to CCC plus, questioning nation's debt repayment ability in the wake of balance of payment crises compounded with erosion of foreign reserves. Pakistan's worsening security situation to delay prospects of exogenous inflows was also behind agency's suspicion over national debt servicing ability.

"Yet rating can not be a perfect yardstick of gauging vulnerability of an economy. Mostly criteria of rating are influenced by subjectivity and tendencies of data collector", remarked Dr. Ayub Mehar DG Research & Development, FPCCI. While taking to PAGE, he said, sovereign rating was based on more qualitative than quantitative results. With reference to S&P's, he told, its analyses of indices are relatively quantitative. Further downgrading in rating highly depends on unfolding prospects in the country, says Dr. Mehar.

"What else can you expect from an observer of present disintegrated conditions prevalent in the country where panic ensues amongst common persons as well as business community," questioned fretful Nasim Baig, CEO Arif Habib. Given the ballooning trade deficit and crumbling economic fundamentals, it is useless to cross examine rating objectivity, he told PAGE. True, some rating outcome misguided investors in world market and was proved wrong, but in Pakistan cause of disturbance is opaque, he replied when standard deviation of rating agencies in global financial market was referred.

Amid US-made global financial mayhem credit rating agencies were castigated for rating dubious investment stocks and financial firms. Reportedly, FBI started probe into veracity of indulgence of insiders and managers in banks and financial institutions debacle. Despite having known looming perturbed situation, concerned officials were alleged to lead docile investors to investment options fraught with full of speculations. The rosy pictures they portrayed to unsuspecting entrants to financial market turned the market into one big treasure trove. Mortgage sector becomes top recipient of catastrophic sequels of financial hiccups. As governments of many developed nations have set to plug holes in porous liquidity, monies of exchequers are said to have become dots.

Fearing safety of capital, investors are becoming extinct and limiting their exposures, even banks are not exchanging capital with each other. Relaxation in interest rates has rightly been realized by leaders of global financial market as strict terms on borrowing precipitate liquidity crunch. Monetary policies of USA, EU, Britain, Sweden, etc. have already resorted to interest cut to improve cash flow condition.

Decrease in CRR limit by the State Bank of Pakistan, though, increases cash holding volume in banks it is unlikely to be helpful in pushing and maintaining economic growth until discount rate is brought to a level below than of present. Several developed economies find plausibility of rate cut. State bank may also think on this line. It may not inevitably befit to economic current scenario where BoP imbalance exacts pump in foreign reserves without which neither exorbitant import bill will be paid off nor will arising debt obligation of $3 billion be met.

At this crucial time when money makers are cowering and 'tightening strings of purse' there is reincarnating lifetime friend of Pakistan and developing economies. Despite scar engraved on Pakistan's credit repayment ability, IMF has expressed its emergency plan to service bailout by intimidating that growth rate in SA nations would decelerate to 3.5 percent.

According to S&P's the appraisal procedure for sovereign takes political and economic risks under consideration both quantitatively and qualitatively. It integrates data about economic indicators to measure performance while it analyses political and policy developments to project debt servicing ability. Political risk, economic structure, economic growth prospects, fiscal flexibility, general government debt burden, offshore and contingent liabilities, monetary flexibility, external liquidity, and external debt burden are factors considered during appraisal.

Dr. Mehar believes that poor credit rating will blur prospects of foreign investments in Pakistan. He said government strategy to tackle the situation was unclear. The government emergency plan to halt rating from being further slid is drastically required. He feared that investment in equity market would greatly be hampered due to downgrading.

"The impact on portfolio investment of downgraded rating will be negligible," argued Nasim. Indian market despite its stable outlook is also experiencing capital exit. There are many nations in the world with positive credit outlook and not downgraded nonetheless they are witnessing capital flight, says he, adding 'reason is quite explicit'. Great strain of financial crisis and liquidity shortage world over is causing constriction in exposure. 'Basically, international investors are not bothering about rating of particular stock or market right at the moment, but they have not choice but to stub out their internal chaos.'

The importance of ratings by international rating agencies can not be denied as these set out directions of investments in financial structure. Both ratings of securities and sovereign determine and guide decisions of investment and divestment. Similarly debts are valued or devalued in international financial market according to their solvency assessment. S&P's, Moody, and other world renowned rating agencies are recognized for facilitation of investment decision making process. But given the fact that often guidelines incorporate expediencies of influential entity that actually relays navigation, credibility of rating can be questioned.