Nov. 14 (Bloomberg) -- Pakistan's credit rating was cut to CCC from CCC+ by Standard & Poor's, the lowest level in 10 years, citing the risk of a default on external debt payments. The rating is under review for a further cut, S&P said.

``The delay by Pakistan in securing external assistance essential for the immediate stabilization of its balance of payments position has further increased the prospect of near-term debt service difficulties, heralding either a rescheduling of commercial external debt or an outright payment default,'' S&P credit analyst Agost Benard said in a statement in Singapore.

Pakistan is seeking funds from the International Monetary Fund, other lenders and donor countries after its foreign reserves shrunk to $3.49 billion as of Nov. 8 from $14.2 billion a year ago, raising concern the country will not be able to pay the $3 billion in debt-servicing costs due in the next 12 months.

``The rating cut comes at a critical time and will hurt Pakistan's efforts to seek funds at Friends of Pakistan meeting,'' said Habib-ur-Rehman, who manages the equivalent of $56 million in stocks and bonds at Karachi-based Atlas Asset Management Ltd.

Pakistan's central bank two days ago raised its benchmark interest rate by 2 percentage points to 15 percent, citing rising inflation. Pakistani opposition parties said the key rate was increased as part of conditions for an IMF loan.

Avoiding Default

Pakistan needs $10 billion over the next two years to avoid defaulting on its debt, according to IMF estimates. The IMF and Pakistani officials held week-long talks in Dubai last month for the loan. Pakistan ended its last IMF program in 2004.

Sovereign ratings may be raised one level if south Asia's second-biggest economy gets the IMF loan and implements the economic stabilization plan endorsed by the lender, the S&P statement said. Further depletion in foreign reserves or fiscal slippage raises the risk of default, it said.

Friends of Pakistan group, which was formed in September to stabilize Pakistan's economy, won't pledge aid or funds in its meeting scheduled on Nov. 17 in United Arab Emirates state of Abu Dhabi, Mohammad Sadiq, a foreign ministry spokesman, said on Nov. 12. The group, which includes the U.S., China and Saudi Arabia, may support Pakistan's efforts to seek aid and funds, he said.

Economic Turmoil

Pakistan is facing economic turmoil after the rupee in October plunged to an all-time low, the balance of payments deficit widened to a record, and inflation jumped to a 30-year high. The economic crisis mounted after the Pakistan Peoples Party-led government was paralyzed for almost six months because of political wrangling.

Pakistan's economy has ``deteriorated significantly'' and growth may slow to a six-year low, the IMF said in an Oct. 20 report. Growth is expected to weaken to 3.5 percent in the year to June 30 from 5.8 percent last year, the IMF said. The government predicts the economy will grow 5.5 percent this year.

Standard & Poor's and Moody's Investors Service lowered credit ratings for Pakistan in October, citing the nation's inability to pay its overseas debt due to eroding foreign reserves.

To contact the reporter on this story: Khalid Qayum in Islamabad at kqayum@bloomberg.net.

Last Updated: November 14, 2008 05:40 EST