Oct 13 - 19, 2008

Pakistan's deteriorating economic indicators are forcing the credit rating agencies to reassess their outlook for the economy. In a recent move, Pakistan's local currency, foreign currency and T&C Assessment have been downgraded to BB-, B-, BB respectively by Standard & Poor's (S&P). Country's escalating budget deficit and a large current account deficit in the balance of payments drove S&P to cut the country's credit rating to "B", with a negative outlook.

Likewise, Moody also 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 "a 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 stabilization". Analysts are still concerned about the continuously depleting foreign reserves and probable missing of repayments of debt installments. Moreover, economy's future is also not promising. After the election of President Zardari, it was thought that there would be domestic political stability but power tussle in Punjab is further deteriorating political climate. In next few weeks it will further aggravate when federal government will induct new federal ministers.

It is also expected that in coming months ahead, economic condition along with law and order situation and domestic political environment will remain tense, volatile and under pressure. Foreign reserves are depleting, government has been trying to get deferred oil payment facility from Saudi Arab which is on hold on US instructions. Saudi Arab provided same facility to Pakistan from May 1998 to 2003 after atomic blasts when oil was traded at US10 dollars a barrel and aggregate amount of the facility was US$5 billion. It may be interesting to note that now oil is trading at above US 100 dollars a barrel and aggregated facility amount is still US$5 billion. Further, country is also facing difficulty in getting foreign remittances while growing trend of capital flight.

Pakistan's current economic condition has not reached this level over night. Experts were aware of the real situation and were raising red flags but government officials were not interested in considering their views and labeled such experts as pessimists and were blamed to be working called against Pakistan. People in credit rating agencies are from this world and don't come from mars, they know the ground realties and have the real facts and figures. Therefore the recent downgrading is neither unexpected nor unjustified. Credit downgrading is not an encouraging element for economy and such events send negative signals to the foreign investors. Though, recent collapse of super-banks of USA and earlier failures such as to predict the 199798 Asian crisis and the bankruptcies of Enron, WorldCom and Parmalat has raised serious questions on the ability, rating process, credibility and accountability of these world class credit rating agencies.

Foreign exchange reserves of the country are at last six years low. Here it would be very interesting to mention that Governor SBP once claimed US$ 16 billion reserves of the country and was expecting additions. Now when reserves are depleting and results of none of the government steps is positive, the same Governor is arguing to maintain minimum level of foreign currency reserve because she now thinks that reserves bear cost. Today reserves are for two months import bill provided country gets certain remittances otherwise reserves are less than two months import bill. With downgraded credit rating, there is significantly lesser chance of foreign investment. The country is yet to suffer another blow due to Marriott tragedy in Islamabad as most of the ratings were done prior to the blasts.

In assessing sovereign risk, agencies highlight several risk parameters of varying importance: (i) economic; (ii) political; (iii) fiscal and monetary flexibility; and (iv) debt burden. Broadly speaking, the economic variables aim at measuring three types of performance: (i) measures of domestic economic performance; (ii) measures of a country's external position and its ability to service its external obligations; and (iii) the influence of external developments. In practice, a small number of variables such as: (i) GDP per capita; (ii) real GDP growth per capita; (iii) the Consumer Price Index (CPI); (iv) the ratio of government fiscal balance to GDP; and (v) government debt to GDP have a large impact on credit ratings. By and large: (i) higher GDP per capita leads to higher ratings; higher CPI inflation to lower ratings, the lower the rating, the lower the government balance as a ratio to GDP; and (ii) higher fiscal deficits and government debt in relation to GDP to lower ratings. With this background, one can easily understand the current and expected sovereign (country's) credit ratings of Pakistan.

Pakistan being the borrowing country, a rating downgrade has negative effects on its access to credit and the cost of their borrowing. Government is trying to get financial assistance from the "Friends of Pakistan" forum which includes China, UAE and Saudi Arabia, besides the members of G-7 However, the exact impact of such initiatives is uncertain and would largely depend on the will of the government to confront the economic problems earnestly, squarely and more realistically. If current government intends to improve sovereign ratings then it has to take serious steps in improving the economic situation of the country along with the controlling law and order situation of the country.