Moody's cuts bond outlook to negative

[Naveed Yaseen]

HONG KONG (September 24 2008): Credit ratings firm Moody's cut its ratings outlook for Pakistan's government bonds to negative from stable because of the country's depleting foreign currency reserves as economic reforms are hit by political mayhem. Moody's analyst Aninda Mitra said on Tuesday he was concerned about arrears on sovereign debt and missed repayments as Islamabad's access to foreign exchange worsens.

The agency also highlighted the risk the economy faces from the growing political turmoil, rising religious extremism and high inflation that could hold up reforms such as liberalisation, deregulation and privatisation.

Total foreign currency reserves stood at $8.91 billion on September 13, barely enough to cover two months of imports at a time when alarming levels of current account and trade deficits could require emergency funding, analysts said. The current account deficit is running well ahead of target: It widened to $2.57 billion in July and August - equivalent to about 1.6 percent of gross domestic product and more than a quarter of the government's full-year target of 6 percent of GDP.

"The outlook has been changed mainly due to the deteriorating economic and law and order situation of Pakistan," said Muhammed Imran, head of research at First Capital Equities Ltd. "The government needs to step up and take some quick, concrete and constructive measures on the economic front to promote exports and curtail imports. Otherwise there will be no improvement."

Moody's action follows Standard & Poor's in June cutting its rating to B from B-plus. S&P has a negative outlook on its rating, meaning another downgrade is on the cards. The country's financial markets have taken a beating - its stock market which rallied for six years has slumped 35 percent since the beginning of the year and the rupee is off more than 21 percent since January, hovering at record lows.

Analysts say the tensions between Pakistan and its largest donor, the United States, over US military strikes against militants on Pakistani territory are adding to concerns because of their possible impact on US foreign aid to the South Asian country. Moody's said any further delays in receiving assistance from offshore sources, which have already contributed to its bleak external position, would be damaging.

"It remains unclear how Pakistan would rebuild its external liquidity in the medium-term, unless either considerably larger amounts of foreign assistance were disbursed, or foreign investor sentiment improved sharply," Mitra said. Moody's also lowered the outlook on its B3 foreign currency bank deposit ceiling to negative, while the outlook on the Ba3 foreign currency bond ceiling remained negative.

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