KARACHI:
This is one of the few advantages of the Pakistani financial system not being intertwined with global capital markets: the downgrading of the country’s sovereign credit rating by Moody’s is unlikely to become an immediate crisis, or have any serious short-term impact on the economy.
Moody’s decision to downgrade Pakistani government bonds from B3 to Caa1 comes as a surprise to most analysts, many of whom feel that the decision does not take into account recent improvements in the country’s macroeconomic stability – most notably the rapprochement with Washington – and falling international oil prices. Nonetheless, a downgrade is a downgrade, and the consequences are something the economy will now have to live with; especially since Moody’s has made it clear that they have no intention of revising Pakistan’s rating upwards anytime soon.
The most immediate impact is likely to be minimal: both the government of Pakistan as well as large Pakistani corporations borrow negligible amounts from international capital markets. The cost of borrowing will most definitely go up, but given the fact that Pakistan’s rating is already well into ‘junk’ territory, the one-notch downgrade is unlikely to make a massive difference.
Nor are international investors in Pakistan’s bond markets likely to be affected by this downgrade for one simple reason: there aren’t any. Pakistani investment bankers in the Middle East, as well as Pakistani asset management companies based in Karachi, have been trying to get international institutional investors to buy Pakistani rupee-denominated government bonds for at least the past five years, and have had almost no success.
While the yields on Pakistani treasury bills are much higher than the meagre rates on offer in most other parts of the world, their credit rating was too low even before this downgrade for institutional players to be interested. Institutional investors are mindful of the average rating of their overall portfolio. Many are not even allowed by their own rules to invest in junk-rated bonds. Even if buying Pakistani bonds would push up their yields, their average rating would be dragged too far down for it to be worth it.
The real damage to Pakistan’s economy is likely to come from the problems of perception of having that low a credit rating. The last time Moody’s decided this low a credit rating – after Pakistan’s nuclear tests in 1998 – the country’s economy was in a bad shape. Foreign investment slowed to a trickle and the rupee plunged over 40% in the following two years.
Some analysts worry that that may happen again. “It will likely add to the pressure on the Pakistani rupee, which is already down 5% since January,” said Burj Capital, an investment bank, in a note issued to clients.
Yet that is unlikely to happen. With the resumption of NATO supplies, Washington will once again resume Coalition Support Funds payments, which in turn will likely stabilise the rupee.
The real concern about the downgrade should come not from the announcement, but what led to it: the government of Pakistan’s persistent inability to pay its bills on time; the short attention spans of politicians who are too busy playing power games to actually govern the country; and the absolute unwillingness of virtually anyone in the country to pay their taxes.
There are many ways to fix the state of the economy, and most of them do not rely on Washington doling out money to Islamabad. But they do require Islamabad to speak the truth to its people: that the era of wasteful, untargeted, distorting subsidies is over and everybody needs to start paying their taxes. If we do that, even an investment grade rating is not out of the question; though one suspects that we may have to wait quite a while before that happens.
Published in The Express Tribune, July 14th, 2012.
COMMENTS (23)
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@John: You make a good point, but the answer is simple. Every government in the world get their countries into debt for reasons I will not go into although many of them are not legitimate. However, all governments, without exception, squeeze the hard working middle class to pay for government excesses. I have lived in several countries; been squeezed by their governments to pay for nonsensical projects, and they all put out the propaganda of what a great job they are doing for the people. The bottom line usually finishes up with intelligent people wondering was the project all that important, being criticized for not wishing to pay tax, noticing that Governments are looking after the wealthy, and having a creeping taxation system that leaves the middle class poor, particularly in their old age.
Pakistan and Zimbabwe have more things in common than love for cricket.
Jihad Zindabad! Strategic Depth Zindabad! Pan Islamic Vision Zindabad! Who cares for these down grades since they are all part of MOSSAD+RAW+CIA Conspiracies to de-motivate & frustrate the highly energetic, honest, dedicated & hardworking citizens of IR of Pakistan.
A good article by Farooq Tirmizi. However, if it had not been for the title, "Pakistan's Downgrade" I would have thought he was writing about a host of countries, most of them from the West, although some of the East Asian countries do not look so good. A lot of people do put-downs on Pakistan's economic performance for good reasons. However, the U.S.A. has a debt of over 200 trillion dollars, people are sleeping in the streets everywhere, and it is just as well to remember that America is a temperate, cold climate country. The same goes for U.K, China, Europe, Australia, Japan, and many others. India has about half a billion people who are desperately poor. Many of the people in the other countries are doing well, but many are not, and their currencies, such as the Euro, are basket cases. Some countries are doing well due to unusual circumstances. Australia appears to be doing well because it has many minerals such as coal and steel that the Chinese buy from them in large quantities To make things better Australia has a very small population, but unlike most Western countries cannot pay a full pension, or any at all, to hundreds of thousands in their old age. It is interesting to note that most of the countries who do not treat their people well seem to have hundreds of billions available to buy weapons of war. I cannot write a complete dissertation about world problems, but can say with a reasonable amount of confidence, that although Pakistan has a long way to go things could be worse. This does not mean of course that the Pakistani people should reduce pressure on their Government.
@abdul karim: Well there is a war on all large and powerful nation states by financial oligarchs even US. Basically this is just the begininning. In coming days expect more Greece like news from all over the globe. Even US is under attack by finance capital. THeir plan is to have smaller states so they are easier to manage when new world system comes. Some say two years some say twenty. Better prepare yourself with actual money, assets and commodities instead of paper.
Conspiracy theory? Read the report titled New World Order - When Demand Overakes Supply by Societe Generale Research.
But all leaders have ratings of a billionaire Does that count?
@Moise: again, these guys are same, no change at all.
In past four odd years the economy of the country has been ruined; especially in last two years.This is dangerous especially in a country which is in midst of social strife
@kaalchakra: 'muslim economists' still need to do a lot of work to offer a sustainable economic model balancing the revenue vs state-expense and the top of that expense of making a state 'islamic welfare' state. Let alone a reliable and fair credit rating system which seems an insane idea at this stage.
Such a major deficiency that in last 200 years no muslim even have tried to work and offer any such workable model with all the numbers and costings. All this talk about some imaginary Islamic economic state is playing to the emotions of people who may be ignorant, uneducated and that only helps them tread faster on the path of more ignorance and extremism - rather then becoming knowledgeable and enlightened people as Islam originally wanted. Unfortunatly. one things we self proclaimed Muslims do best - shout, remain ignorant and suppress all sensible approaches and better spiritual approaches.
@kaalchakra: "Pakistan to rate itself, won’t that be much more becoming of a sovereign nation so it cannot be subjected to rating ‘drone attacks".
It 's like parents opening a school where their child is the only student and then giving their child A+ in every subject. They can do that but no college will give admission on the basis of those grades nor will any employer hire on the basis of those grades.
"Why don’t we have an Islamic credit rating system which avoids the risk of discrimination by outsiders?" Anything that avoids discrimination is desirable. But what evidence do you have that there was discrimination in this rating? Yes there has been errors by these rating agencies but I do not know of any system that is error proof.
@Moise: what big deal they doing to lot of countrey even s&p 500 ,
@kaalchakra: How right you are Kaalchakra especially the bit about - or anything else, for that matter.
Gift from US banks.
So what? The US was downgraded as were many European countries too.
Why care what Moody does?
DOOMY is never going to change AAA rating of Pakistan.
AAA Allah-Amrekaa-Army
Don't know much about the economy (or about anything else, for that matter), but the vast system of Islamic finance seems very exciting. Why don't we have an Islamic credit rating system which avoids the risk of discrimination by outsiders? Were Pakistan to rate itself, won't that be much more becoming of a sovereign nation so it cannot be subjected to rating 'drone attacks'.
Well put. But in simple words we need honest people to guide us .
Not the junk that currently lead us.