Moody’s cuts Pakistan ratings, on review for downgrade

Moody's Investors Service has lowered the Pakistani government's bond ratings from B2 to B3 and kept the ratings on review for downgrade. In September, Moody's had moved the outlook from ‘stable’ to ‘negative’.
"The rating action was prompted by the continuing erosion of the country's external liquidity position, which has remained inadequately addressed by policy adjustments and has suffered from delays in assistance from key bilateral and multilateral creditors," said Aninda Mitra, Moody's sovereign analyst for Pakistan.
"The failure to obtain timely assistance from Saudi Arabia, China, the US and other friends, and delays in disbursements from the World Bank have eroded investor confidence and resulted in a substantial drawdown of Pakistan's foreign currency reserves," said Mitra, cautioning that "ongoing negotiations for an IMF assistance program represent a last resort, but even this may not fully assure Pakistan of the ability to remain current over time on its external obligations, including payment on its global bond due in February 2009."
"Uncertainty about the size, timeliness and durability of an IMF program were the main drivers for keeping the ratings on review for downgrade," explained the analyst.
"Meanwhile, domestic demand management policies have proven inadequate, and structural reforms to improve tax administration or generate higher domestic savings would take more time and face a challenging domestic political environment," noted Mitra, adding, "delays evident in the de-monetization of fiscal deficits, in particular, reflect insufficient policy adjustments and had blunted macro-economic stabilization."
"While the continuing strength of remittance inflows, the reduction in international oil prices, and the recent pick-up in tax collections would help at the margin, they would not anytime soon offset the large financing risks posed by Pakistan's twin deficits," said the analyst.
Medium-term considerations also played a role in Moody's decision to place Pakistan's sovereign credit ratings on review for downgrade.
"Even if an IMF assistance package were to avert a near-term default, Pakistan's intrinsic ability to generate greater access to foreign exchange has dimmed," said Mitra. He added that "insufficient macro-economic adjustments, weak prospects for structural reforms, and a chronic shortage of foreign exchange were likely to heighten Pakistan's need for medium-term balance-of-payments support, or raise the risk of a hard economic landing."
"As a result, Pakistan's external credit metrics and access to liquidity are now expected to remain more precariously positioned than at similarly rated countries," said the analyst.
"Additionally, the global credit crisis and a rapidly weakening world economy may also further limit any export-led or foreign-investment-driven recovery prospects for the Pakistani economy, or a replenishment of the country's foreign currency reserves," said the Singapore-based analyst.
"Although Pakistan's tumultuous political transition had ended, the apparent lack of a domestic political consensus in effectively tackling the growing threat of Islamic militancy may worsen the level of violence," said the analyst, adding, "this situation could complicate prospects for confidence-sensitive inflows from official creditors and private investors."
Concurrent to the rating decision on the Pakistani government's bond ratings, the foreign currency bond ceiling was lowered from Ba3 to B1; and the foreign currency deposit ceiling was maintained at B3. Both ceilings were also put on review for downgrade. Lastly, the local currency deposit ceiling was lowered from Baa2 to Ba2 to reflect the risk that, in the current circumstances, the government's ability to support the banks in case of emergency has diminished.