S & P maintains Pakistan’s debt ratings

Improved liquidity position backed by foreign loans does the trick.

KARACHI: Standard & Poor’s credit rating agency has affirmed Pakistan’s long-term rating on foreign currency debt at a stable ‘B-’ because of a better financial position.

“The ratings affirmation takes into account Pakistan’s improved external liquidity position, which was largely due to the International Monetary Fund’s (IMF) standby loan agreement and other bilateral and multilateral support,” said Standard & Poor’s credit analyst Agost Benard in a communique on Monday.

The IMF approved a loan worth $11.3 billion aimed at improving the country’s balance of payments in 2008 when foreign exchange reserves had fallen sharply.

The ‘stable’ rating was for senior unsecured foreign-currency debt as well as expected recovery of 60 to 70 per cent in the event of a distressed debt exchange or payment default.

The rating agency, nonetheless, highlighted once again the key risks including high public and external indebtedness, narrow revenue base, domestic political uncertainties and security risk.

“We could lower the ratings if major slippages in policy occur like renewed balance of payment difficulties or rising public debt,” Benard added.

The agency also maintained the short-term outlook at ‘C’.

The coming months will be critical for the country’s road to recovery, according to IGI Securities. Monsoon floods have dealt a heavy blow to the economy in fiscal year 2011 with losses standing at $10 billion, according to initial damage assessment by the World Bank and Asian Development Bank.

Inflation is expected to spiral to an average 15 per cent by June 2011 while fiscal deficit is likely to overrun target to stand at seven to eight per cent of gross domestic product. Besides, balance of payments deficit is expected to hit $2 billion.

This indicates further monetary tightening in fiscal year 2011 as external inflows are likely to be constrained by economic vulnerabilities, said analysts at IGI Securities.

On the domestic front, high government borrowing, low private sector credit growth and less capital spending will constrain economic growth fundamentals moving forward, added analysts.

Furthermore, if policy-makers are unable to make headway in implementing IMF terms and conditions on power and tax reforms, delays in the receipt of IMF loan tranches amounting to more than $3 billion are inevitable, added analysts.

Published in The Express Tribune, November 16^th, 2010.