Pakistan's Rating Cut by S&P on Debt Payment Concern (Update3)

Oct. 6 (Bloomberg) -- Pakistan's credit rating was cut by Standard & Poor's, which doubts about the country's ability to meet $3 billion in debt-servicing costs as terrorism risks grow and investors flee emerging markets.

The nation's long-term foreign-currency rating was cut two levels to CCC+ from B, with a negative outlook, the U.S. rating company said in a report today. The rating may be lowered further if the government fails to stop the growing external imbalances, the report said.

Pakistan's President Asif Ali Zardari is seeking $100 billion to overcome the nation's economic crisis and to fight terrorism, the Wall Street Journal reported last week. The funds will help stop the outflow of capital from the country each time there is a bomb blast and it will build business confidence, Zardari said, according to the report.

``It is not a good sign for future foreign inflows,'' said Muzzammil Aslam, an economist at KASB Securities Ltd. in Karachi. ``This will halt efforts by Pakistan to raise funds from international financial markets and it will have to seek funds from bilateral or multilateral lenders.''

Pakistan is the world's riskiest government borrower, according to credit-default swap prices from CMA Datavision, with investors concerned by a deterioration in security that saw 53 people killed in a bomb attack on the Islamabad Marriott hotel last month.

``The negative outlook reflects our expectation that multilateral and bilateral aid, including deferred oil payment schemes, may not be timely enough,'' S&P said in the statement. The agency cut Pakistan's rating to B in May.

Foreign-Exchange Reserves

Pakistan is running short of money to repay state debt. Its foreign-exchange reserves have dropped 67 percent in the past year to about $4.7 billion, S&P estimated.

Pakistan's next interest payment on its dollar-denominated bonds is due in December and the government is scheduled to repay $500 million in February on a 6.75 percent note.

Credit-default swaps on Pakistan's $2.7 billion of dollar- denominated bonds outstanding have more than doubled since the start of September to 2,050 basis points, Royal Bank of Scotland prices show. That means it costs $2.05 million annually to protect $10 million of the country's debt from default for five years.

Karachi's KSE100 Index has lost more than a third of its value this year and the rupee has fallen 27 percent. The Karachi Stock Exchange imposed trading curbs on Aug. 28 that stopped stocks from falling below their Aug. 27 level. The curbs are due to be reviewed this month.

Balance of Payments

Pakistan's balance of payments deficit increased six-fold in the first two months of the year that started July 1 to $2.5 billion and the current account deficit reached 1.6 percent of the $150 billion gross domestic product, the report said.

``Pakistan's balance of payments is under significant and rising pressure,'' S&P said. Capital inflows are ``increasingly deterred by the prolonged political uncertainty and adverse security climate.''

An economic bailout may be considered by members of the Friends of Pakistan group, which is led by the U.S., the U.K. and the United Arab Emirates, at a meeting in Abu Dhabi this month, Dawn newspaper reported Oct. 5.

The group's first meeting was held in New York on Sept. 26 on the sidelines of the annual UN General Assembly. The other countries who joined the Sept. 26 meeting were Australia, Canada, China, France, Germany, Italy, Japan, and Turkey.

More than 2,000 people were killed in Pakistan in 2007 in terrorist attacks that the government blames on militants opposed to its support of the U.S.-led campaign against terrorism.

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

To contact the editor responsible for this story: David Tweed in Tokyo at dtweed@bloomberg.net