S&P raises Pak rating

International rating agency Standard & Poor's Ratings Services today revised Pakistan's outlook on long-term sovereign credit ratings from stable to positive, citing the country's improved fiscal and macroeconomic performance.

At the end of June this year, S&P had retained India's sovereign rating at junk grade and maintained a negative outlook for the country.

However, Moody's, another rating agency, had in mid October placed India's Ba1 ceiling for foreign currency debt on review for possible upgrade to investment grade. Recently, Fitch said an improvement in India's ratings would depend on the Pakistan issue.

S&P affirmed Pakistan's 'B/B' foreign currency and 'BB-/B' local currency sovereign ratings. According to the rating agency, the outlook revision reflects the country's improved fiscal and macroeconomic performance, growing external liquidity and continued structural reforms under Prime Minister Jamali's government.

The negative outlook on India, according to S&P, reflects the risk that the government's debt burden may continue to rise rapidly over the medium term, especially if the GDP growth were to decelerate.

"Since coming to power about a year ago, the Jamali-led coalition government in Pakistan has remained steadfast in practicing prudent economic management. Investor confidence and economic stability have been boosted by the reduction in Pakistan's general government deficit (excluding grants) to 4.4 per cent of GDP in fiscal 2003, a 27-year low," said Standard & Poor's Sovereign credit analyst Chih Wai Liew in a statement.

Although still incremental, Pakistan's progress on the extensive structural reforms agenda is largely on track. Pakistan's economy outperformed expectations by registering a real GDP growth of 5.8 per cent in fiscal 2003.

This is the fastest growth since 1992. The higher growth rate reflects cyclical factors, particularly good rainfall and growing domestic confidence.

Inflation has declined to 3.1 per cent, the lowest level in more than a decade, and external liquidity has improved, with foreign exchange reserves exceeding $10 billion at the end of October 2003, according to the rating agency.

India's foreign exchange reserves are now at $95.373 billion. The GDP is expected to grow by more than 6.5 per cent in the current fiscal.

The agency added that the ratings could improve if the government can build stronger public consensus on the structural reforms required to create a virtuous cycle of sustained economic growth, employment generation, and poverty reduction.

The credit standing can also improve if the government manages to tighten public finances by widening the tax-base, improving compliance and making public expenditure more efficient in improving living standards.