'Outlook negative': S&P lowers foreign currency rating

[Naveed Yaseen]

HONG KONG (October 07 2008): Standard & Poor's Ratings Services said on Monday its 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, we lowered our 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-', while the foreign currency debt rating has been lowered to 'CCC+' from 'B'. 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 Agost Benard. "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 sixfold 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.

The negative outlook reflects our expectation that multilateral and bilateral aid, including deferred oil payment schemes, may not be timely enough, or sufficient in magnitude to stem the loss of external liquidity. It also incorporates the view that the necessary policy measures, some of which are likely to be prerequisites for multilateral assistance, will face obstacles and delays in implementation, given the fractious and unstable domestic political scene, and rising social tension.

The rating on Pakistan could be lowered further if the foreign exchange reserve cushion continues to shrink and meaningful economic stabilisation measures remain wanting. Conversely, the rating could stabilise and eventually be raised if external assistance and domestic policy programs successfully stabilise Pakistan's balance of payments position and foreign reserves.

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