Moody's confirms Pakistan's B3 sovereign bond ratings

[Naveed Yaseen]

SINGAPORE (December 13 2008): Moody's Investors Service has confirmed with a negative outlook Pakistan's B3 sovereign bond ratings while removing the review for possible downgrade. The bond ratings were lowered to B3 from B2 in October 2008 on account of intensified external liquidity pressures and the unavailability of, or delays in, expected assistance from key allies and official creditors.

The B3 ratings were taken off review for downgrade' on account of the recent finalisation of a two-year, 7.6 billion-dollar stand-by financing agreement with the International Monetary Fund (IMF), which will avert a near term sovereign debt default," says Moody's sovereign analyst for Pakistan Aninda Mitra.

"Nonetheless, the IMF programme remains subject to considerable downside risks that could emanate from worsening external conditions or regional geopolitical tensions that were brought into sharp focus by the Mumbai terror attacks" says Mitra. "Worsening external conditions could result in lower donor assistance or FDI inflows from Gulf Arab countries; and it could even lower remittance inflows from Pakistani expatriate workers," says the analyst.

"The Mumbai terror attacks could also affect domestic political stability, and ultimately creditor confidence, if authorities failed to forge a national consensus for lowering regional tensions as well as preventing further domestic political polarisation or institutional rifts," says Mitra, adding that "substantial socio-economic hardships, as a result of programme adjustments and a sharp slowdown in growth expected this year, will add to the socio-political tensions."

The analyst noted that IMF assistance programme was designed to fill external financing gaps that were predicated on an ability to reduce macroeconomic imbalances through 2010. He also added that the programme conditions were generally congruent with host-country stabilisation plans. Nonetheless, the success of the programme, and, ultimately, an improvement in sovereign creditworthiness remained subject to the response of official creditors and private investors.

"If Pakistan's macro imbalances and confidence-sensitive capital account flows showed substantial and sustained improvements over the next 12-18 months, an improvement in the outlook could be considered," concluded the analyst. Concurrent to the outlook decision on the Pakistani government's bond ratings, the outlook on the B1 foreign currency bond ceiling was also changed to negative; as was the outlook on the B3 foreign currency deposit ceiling.

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