SINGAPORE: The international crated rating agency, Standard & Poor’s Ratings Services on Tuesday revised its outlook on the long-term foreign and local currency sovereign credit ratings of the Pakistan to negative from stable. “The outlook revision reflects heightened and prolonged political uncertainty after President Pervez Musharraf’s declaration on the state of emergency on Nov. 3, 2007, and its potential impact on economic growth, fiscal performance, and external vulnerability,” said Standard & Poor’s credit analyst Agost Benard.
At the same time, Standard & Poor’s has affirmed its ‘B+/B’ foreign currency and ‘BB/B’ local currency sovereign credit ratings on the republic. The sovereign’s political and security situation has deteriorated markedly in recent months. Before declaring a state of emergency, President Musharraf was undergoing what many perceived to be the most severe challenge to his authority since he came to power eight years ago.
This period of increased uncertainty has been marked by violent social unrest relating to the removal of the country’s chief justice, Lal Masjid siege in Islamabad, and the assassination attempts on the president’s life.
“With the declaration of the state of emergency, the political turmoil and security concerns reached new highs, and prospect of swift political resolution became more distant,” Mr. Benard said. “The negative outlook reflects the likelihood of a downgrade if the current political turmoil results in economic policy setbacks, in weaker economic and fiscal performance, or in higher external debt and debt service burdens. The outlook could be revised to stable if political pressures ease and the government is able to focus effectively its efforts on fiscal consolidation and further economic reform.”
The expansionary stance of the 2007-2008 budget has led to heightened concerns over the country’s fiscal position, which remains vulnerable given the government’s high debt and debt-service burdens. Recent events exacerbate the risk of expenditure overruns and revenue shortfalls, thereby increasing the risk of exceeding the 4% deficit target.
In addition to potential fiscal impact, the political turmoil exposes the sovereign to external pressures if foreign direct investments and other equity inflows, which have funded about two-thirds of the country’s large current account deficit (estimated at just under 20% of current account receipts in fiscal 2006-2007), diminish significantly.