07/10/2008
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S&P’s cuts Pak rating to few levels above default
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Debt servicing seen in straits
KARACHI: Pakistan's credit rating was cut by Standard & Poor’s that has put the country’s ability to meet $3 billion debt servicing cost in hot waters as terrorism risks grew and investors fled emerging markets.
The nation’s long-term foreign currency rating was cut by two levels to CCC+ from B with a negative outlook slightly above few notches from default level, the US rating company said in a report on Monday. The rating may be lowered further if the government fails to stop the growing external imbalances, the report noted.
President Asif Ali Zardari is seeking $100 billion to overcome the nation’s economic crisis and to fight terrorism, a foreign newspaper reported last week. The funds will help stop the outflow of capital from the country occurs each time there is a bomb blast and it will build business confidence, Zardari said, according to the report.
"It is not a good sign for future foreign inflows," said Muzzammil Aslam, an economist at KASB Securities Ltd in Karachi. "This will halt efforts by Pakistan to raise funds from international financial markets and it will have to seek funds from bilateral or multilateral lenders", he added.
"The negative outlook reflects our expectation that multilateral and bilateral aid, including deferred oil payment schemes, may not be timely enough," S&P said in the statement. The agency earlier cut Pakistan's rating to B in May. The country is running short of money to repay state debt. Its foreign exchange reserves have dropped 67 per cent in the past year to about $4.7 billion, S&P’s estimated.
Pakistan’s next interest payment on its dollar-denominated bonds is due in December and the government is scheduled to repay $500 million in February on a 6.75 per cent rate.
"Credit-default swaps on Pakistan’s $2.7 billion of dollar- denominated outstanding bonds have more than doubled since the start of September to 2,050 basis points", Royal Bank of Scotland prices show. That means it costs $2.05 million annually to protect $10 million of the country's debt from default.
On the other hand KSE 100-Index has lost more than a third of its value this year and the rupee has fallen 27 per cent. The Karachi Stock Exchange imposed trading curbs on August 28 that stopped stocks from falling below their August 27 level. The curbs are due to be reviewed this week.
According to the report of credit rating agency, Pakistan's balance of payment’s deficit increased six-fold in the first two months of the current financial year to $2.5 billion and the current account deficit reached 1.6 per cent of the $150 billion gross domestic product (GDP).
"Pakistan's balance of payment is under significant and rising pressure," S&P said and added that capital inflows are "increasingly deterred by the prolonged political uncertainty and adverse security climate".
An economic bailout may be considered by members of the Friends of Pakistan group, which is led by the US, the UK and the United Arab Emirates, at a meeting in Abu Dhabi this month, a local newspaper reported recently.
It may be recalled that the group's first meeting was held in New York on September 26 on the sidelines of the annual UN General Assembly. The other countries that joined the September 26 meeting were Australia, Canada, China, France, Germany, Italy, Japan, and Turkey. -Agencies
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