CREDIT RATING

S.M.ABBAS ZAIDI,
(feedback@pgeconomist.com)
Research Analyst
, PAGE
Sep 13 - 26, 2010

Credit rating is an independent opinion expressed by the professional bodies i.e. credit rating agencies that state about capacity of an entity to meet its obligations and such label is based on various quantitative and qualitative factors. The rating, therefore, represents the opinions of respective rating agencies and does not represent investment advice or should be construed as such.

Pakistan Credit Rating Agency (Pacra) is the first credit rating agency in the country and is widely acknowledged for its professionalism and integrity. To date, Pacra has completed well over a hundred ratings, including major industrial corporations, financial institutions, and debt instruments.

LONG TERM RATINGS

AA - VERY HIGH CREDIT QUALITY

'AA' ratings denote a very low expectation of credit risk. The capacity is for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.

A - HIGH CREDIT QUALITY

'A' ratings denote a low expectation of credit risk. This capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.

BBB - GOOD CREDIT QUALITY

'BBB' ratings indicate that there is currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. This is the lowest investment grade category.

BB - SPECULATIVE

'BB' ratings indicate that there is a possibility of credit risk developing, particularly as a result of adverse economic change over time. However, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade.

B - HIGH SPECULATIVE

'B' ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met. However, capacity for continued payment is contingent upon a sustained, favorable business and economic environment.

CCC, CC, C HIGH DEFAULT RISK

Default is a real possibility. Capacity for meeting financial commitments is solely reliant on sustained, favorable business or economic developments. A 'CC' rating indicates that default of some kind appears probable. 'C' ratings signal imminent default.

SHORT TERM RATINGS

A1+: Obligations supported by the highest capacity for timely repayment.

A1: Obligations supported by a strong capacity for timely repayment.

A2: Obligations supported by a satisfactory capacity for timely repayment, although such capacity may be susceptible to adverse changes in business, economic, or financial conditions.

A3: Obligations supported by an adequate capacity for timely repayment. Such capacity is more susceptible to adverse changes in business, economic, or financial condition than for obligations in higher categories.

B: Obligations for which the capacity for timely repayment is susceptible to adverse changes in business, economic, or financial conditions.

C: Obligations for which there is an inadequate capacity to ensure timely repayment.

D: Obligations which have a high risk of default or which are currently in default.

DOMESTIC AND EXTERNAL DEBT

Pakistan's external debt and liabilities have witnessed an increase of $1.304 billion just in three months (April to June 2010) whereas total burden remained $55.628 billion by 30th June 2010.

However, the foreign debt and liabilities were recorded at $54.324 billion on March 31, 2010 showing an increase of 2.4 per cent in just three months. External debt and liabilities were $43.141 billion in 2008, which have now reached 55.628 billion showing an increase of 28 per cent in the last two years. If the increase in foreign debt and liabilities remained in the same ratio i.e. $1.3 billion in every three months then after a year an amount of $5.2 billion would be added every year.

The country's multilateral external debt and liabilities reached $23.276 billion. The breakup of this category is $11.586 billion from Asian Development Bank (ADB), $1.722 billion from International Bank for Reconstruction and Development (IBRD) and $9.777 billion from International Development Association (IDA). From other sources, the government took $664 million by June 30 2010. These sources are European Investment Bank (EIB) $59 million, Islamic Development Bank (IDB) $377 million, International Fund for Agricultural Development (IFAD) $186 million, NORD Development Fund $14 million, and OPEC fund $22 million.

CONCLUSION

According to the country's sovereign credit ratings, Pakistan would not be immediately affected, as the International Monetary Fund would ease loan financing terms for the country. Pakistan's B-/Stable/C rating is not immediately affected by large-scale flooding in the country. Apart from washing away roads and bridges, the floods have also damaged at least 3.2 million hectares of cultivated land. The total cost so far in crop damages is about Rs245 billion. The flooding significantly raises near-term growth and inflation risks and most probably smears any near-term opportunity for transitioning back to the country's growth trend with manageable inflation and macroeconomic balance. In other words, economic stabilisation is under pressure.