Moody’s drops Pakistan’s rating outlook to “negative”

Moody’s Investors Service has changed the outlook to ‘negative’, from ‘stable’, on the B1 government foreign- and local-currency bond ratings fro Pakistan following President Musharraf’s imposition of emergency rule during the weekend.

A negative outlook was also placed on Pakistan‘s B2 foreign-currency country ceilings for bank deposits. The outlook for Pakistan‘s Ba3 foreign-currency country ceiling for bonds is unaffected by this action and remains stable.

Moody’s believes that the imposition of emergency rule represents a further erosion in Pakistan‘s governing capacity and underscores Pakistan‘s heightened political instability. President Musharraf’s narrowing domestic support base and shakier relations with the U.S. and other key international allies now appear to be a greater threat toinvestor confidence than was true in the past.

“The imposition of emergency rule considerably complicates the domestic political scene,” said Moody’s Vice President/Senior Analyst Aninda Mitra.

“From a credit perspective, the emergency rule, and more important, the factors behind such an action could undermine Pakistan‘s ability to sustain significant inflows of confidence-sensitive capital, which have financed a considerable portion of the country’s large current account deficit,” said Mitra.

Political turbulence in Pakistan since the beginning of this year had been shrugged off by foreign investors and domestic market participants, who remained confident that the country could muddle through. “However the balance of risks now appears to be shifting to the downside,” said the analyst.

Looking ahead, a ratings downgrade could occur if external capital inflows significantly diminished or if a loss of domestic confidence led to a major slowdown in economic activity or otherwise undermined macroeconomic stability.