Moodys upgrades Pakistan’s rating

[Naveed Yaseen]

KARACHI: Moodys Investors Service Monday upgraded Pakistan's rating from B3 with negative outlook to B3 with stable outlook.

Moodys cited greater financial assistance from the IMF and subsequent lowering of potential risks to BoP stability from any drop in private capital inflows as the reason for the rating upgrade.

Analysts said that this action is inline with the expectations due to some improvement on the economic front. However, despite this, Pakistan's credit rating is still lower than that for most other economies in the region, where respective long-term sovereign rating for Hungary and Turkey are Baa1 and Ba3.

Considering that Pakistan's broad economic fundamentals are comparable and in some cases even better than these two economies, analysts expected further upward revision in Pakistan's rating if political risks remain manageable.

In addition, they expected that aid flows would increase further in view of next Friends of Democratic Pakistan meeting in Turkey. "This should keep both the fiscal and the external side balanced and at the same time contribute towards reserve buildup", they believed.

Pakistan's economy has been showing considerable signs of recovery. Headline inflation has declined to 11.2 percent in July 2009 from its peak of 25.3 percent in August 2008. Core inflation has also dropped to 14.0 percent in July-09 from its peak of 18.9 percent in Feb-09.

Current Account Deficit has come down to 5.3 percent of GDP in FY09 compared to 8.5 percent in FY08 while fiscal deficit has slipped from 7.6 percent of GDP to 4.3 percent during the same period.

Furthermore, compared to FY09, exchange rate has become relatively stable while Pakistan's Forex reserves have increased to USD11.8bn from USD9.9bn in December 2008 .

All of these factors had already been pointing towards a favorable review from international credit rating agencies.

Compared to a net outflow of $442 million from the local bourse during FY09, re-emergence of foreign investor confidence is visible with $ 49 million net inflow since July'09.

Given the huge discount at which KSE-100 is trading relative to its regional peers, analysts expected the re-rating of the local equity market to continue. The KSE-100 index is currently trading at a CY09 P/E 7.6x and offers a prospective dividend yield of 8.2 percent. Our top picks are HUBC, KAPCO, OGDC, POL FFC, MCB, PTC.

Meanwhile, Moody also upgraded Pakistan's bank ratings for NBP, HBL, UBL and MCB from negative to stable. staff report

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