Moody’s Cuts Pakistan Credit Rating Deeper Into Junk

Pakistan’s credit rating was lowered deeper into junk status by Moody’s Investors Service, which cited dwindling currency reserves and political instability.

The foreign- and local-currency bond ratings were cut one step to Caa1 from B3 with a negative outlook, Moody’s said in a statement yesterday. That hands Pakistan its lowest assessment in more than a decade, putting it on the same level as Cuba and below countries including Nicaragua.

The main driver of the move “is the increasing strain on the country’s external payments position as a result of a rising trade deficit and decline in capital inflows,” Moody’s said. Weak government finances, inflationary pressures and political uncertainty also weigh on Pakistan’s creditworthiness, it said.

Pakistan’s $200 billion economy faces the fastest inflation in Asia, lingering power blackouts, an insurgency on the Afghan border and reduced aid flows. Political tension has increased after a dispute between civilian leaders and the judiciary led to Yousuf Raza Gilani’s ouster as prime minister last month.

The benchmark Karachi Stock Exchange 100 Index (KSE100) fell 0.5 percent to 14,332.29 yesterday. Pakistan’s rupee, which has weakened about 9 percent against the dollar in the past 12 months, was little changed at 94.425 per dollar.

‘Bad News’

“This is really bad news for the market,” said Abdullah Ahmed, head of treasury at Karachi-based Meezan Bank Ltd. (MEBL), the nation’s biggest Islamic lender. “Banks, which are the biggest lenders to the government, will have to revisit their investment strategy. Bond investors will certainly ask for a higher interest rate after this downgrade.”

Large debt repayments to the International Monetary Fund due in the period from 2012 to 2015 contributed to the ratings action, Moody’s said. Pakistan has to repay about $7.5 billion, with $1.2 billion already handed over as of June, it said.

Foreign-exchange reserves declined to $14.9 billion on July 12 from a record $18.3 billion at the end of the same month in 2011, figures from Pakistan’s central bank show.

The government estimates the economy probably expanded 3.7 percent in the 12 months ended June 2012. It has a goal of 4.3 percent growth for the current fiscal year, even as political volatility and power blackouts of as long as 18 hours a day in major cities threaten to deter investment.

‘Odd’ Timing

The nation’s top court yesterday directed Prime Minister Raja Pervez Ashraf to seek the reopening of graft cases against President Asif Ali Zardari by July 25. Judges ousted his predecessor Gilani for refusing to abide by a similar order.

The “factious” relationship between Pakistan’s elected political leaders, the judiciary and the military undermines the government’s ability to formulate policies to address domestic economic challenges, Moody’s said.

Still, the timing of the ratings cut is “a bit odd” as Pakistan will soon receive more than $1 billion from the U.S., said Asif Ali Qureshi, executive director at Optimus Capital Management Pvt. in Karachi. He added investors are more optimistic now than a couple of months ago when ties between the two countries frayed.

The Pentagon is preparing to release about $1.1 billion withheld from Pakistan’s military after the South Asian nation agreed this month to reopen supply routes into Afghanistan.

The withheld dollars are part of the U.S. Coalition Support Fund to reimburse Pakistan for its support of U.S. counter- insurgency operations, Pentagon spokesman Navy Captain John Kirby said on July 5. Payments were suspended last year amid increased U.S.-Pakistan tensions.

Moody’s said it may downgrade Pakistan again if its political environment deteriorates substantially and currency reserves decline further.

Pakistan left interest rates unchanged for a fourth meeting in June to counter inflation exceeding 11 percent. That’s the fastest pace of price increases in a basket of 17 Asia-Pacific economies tracked by Bloomberg.

To contact the reporter on this story: Haris Anwar in Islamabad at hanwar2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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