HONG KONG: Pakistan's credit rating was cut on Tuesday by one level to B3 by Moody's Investors Service, which warned of further cuts given the depletion of the country's foreign exchange reserves. The country is scrambling to borrow funds to provide it with some breathing room, although many analysts expect it will have to seek...
HONG KONG: Pakistan's credit rating was
cut on Tuesday by one level to B3 by Moody's Investors Service,
which warned of further cuts given the depletion of the
country's foreign exchange reserves.
The country is scrambling to borrow funds to provide it
with some breathing room, although many analysts expect it will
have to seek support from the International Monetary Fund to
overcome economic problems that stemmed from high oil and food
Moody's retained a negative outlook which it had imposed
last month after Pakistan's rapidly deteriorating external
liquidity position accompanied a stalling of economic reforms
and mayhem in its domestic politics. (Full statement
Aninda Mitra, Moody's sovereign analyst for Pakistan, said
recent policy moves were not sufficient to stanch the decline
in its foreign currency pile, which was further hastened by
delays in assistance from key bilateral and multilateral
“The failure to obtain timely assistance from Saudi Arabia,
China, the U.S. 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,” he said.
Traders said the markets had already priced in Tuesday's
downgrade and any further reduction from Moody's.
Earlier this month, rival rating agency Standard & Poor's
Ratings Services cut Pakistan's rating to CCC-plus, one notch
below Moody's. S&P has retained the negative outlook.
Fitch Ratings does not have a rating on Pakistan.
Pakistan's five-year credit default swaps (CDS) —
insurance-like contracts that protect against defaults and
restructuring — were quoted at more than 50 percent upfront, a
That means the protection seeker has to pay $5 million to
the insurer before signing the contract for every $10 million
of principal that has to be insured. It is equivalent to a CDS
level of 5,000 basis points (bps), the trader said.
The rupee and stocks were flat following the ratings
downgrade. 1/8ID:nSIN359909 3/8
FOREIGN EXCHANGE DRAIN
Pakistan's foreign currency reserves have been falling at a
rate of nearly $1 billion a month, and the central bank has
barely enough to cover six weeks of imports.
Total reserves, including those held by commercial banks,
stood at $7.32 billion on Oct. 18. The central bank accounts
for $4.04 billion of the total.
Pakistan's economic woes began before the global financial
crisis escalated last month.
Like most emerging economies, Pakistan was badly hit by
soaring global oil and food prices. The country's trade deficit
ballooned and inflation soared. The rupee has slumped 24
percent this year against the dollar.
Pakistan needs $10 billion to $15 billion of support from
foreign lenders to cover its current account financing gap and
undertake economic adjustments over the next two years, Shaukat
Tarin, advisor to Pakistan's prime minister, said last week.
Tarin later told a news conference in Islamabad the country
still hoped to secure funds from other lenders, including
friendly governments, to fill a financing gap of between $3.5
billion and $4.5 billion.
Last week, an IMF spokesman said talks between the fund and
Pakistani officials should enable the Fund to respond quickly
if and when Pakistani authorities make a formal request for
financial support from the International Monetary Fund.
Financial markets are mostly worried about a $500 million
obligation that the country faces in February when its 2009
“From a market perspective, what matters is whether they
can pay on their commercial obligations,” said David Fernandez,
JPMorgan's head of economic and sovereign credit research.
He said that out of the country's $46.2 billion external
obligations, only $2.65 billion is commercial, of which only
$500 million falls due next year.
Fernandez said any IMF support and rollovers from
concessional lenders should combine to give Pakistan sufficient
resources to pay off its 2009 bonds.
But Moody's Mitra said that even if it were to successfully
meet its obligation next year, there has been a structural
damage to the country's ability to strengthen its external
“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,” he said.