Moody'S Review New Blow To Pak Economy

Pakistani officials are taking undisclosed new proposals to Washington this week to try to convince the International Monetary Fund to reactivate a stalled $600 million standby loan.

We hope it does not happen, but when a rating agency places a country under review the probability of it coming down is very high, said Farrukh Hassan, country head of Crosby Securities.

Moody's said it may cut Pakistan's B1 long-term foreign currency rating and its B2 sovereign ceiling for foreign currency deposits. Pakistan's B1-rated foreign currency bonds and notes were also placed on review for possible downgrade.

It voiced concern at Pakistan's weakening macroeconomic fundamentals, as evidenced by the deviations from long-standing goals of economic restructuring, as well as increased levels of short-term debt and ongoing balance of payments difficulties.

 

I disagree that the macroeconomic situation is that bad, said Sikander Khawaja, chief representative of SB James Capel. We felt the budget was tough, positive and export-oriented... but (it) was a step in the right direction.

Kalim Aziz at ING Baring Securities said Moody's move would depress sentiment and force Pakistan, already paying 1.5-2.0 per cent above the London Interbank Offered Rate on commercial loans, to pay even higher interest rates.

I think Moody's perception has been clouded by Pakistan's domestic political troubles, not the reality, he said, adding that he did not believe a downgrading was necessary.

Raza Mirza, head of research at securities house KASB & Co, said Moody's action would put more pressure on depleting foreign currency accounts. He quoted bankers as saying $200 million in foreign exchange deposits had been withdrawn in recent weeks.

Political and economic problems have already cornered the government and these would be compounded if short-term creditors halt loans to Pakistan or call in their money, he said.

He said the markets were already scared, and the credit rating review would tend to confirm their apprehensions.

Mirza said Pakistan did not have enough reserves to meet its foreign exchange liabilities, and any run on forex accounts or outflow of large institutional deposits could be dangerous.

He said a positive outcome to the IMF talks could persuade Moody's not to downgrade Pakistan's ratings, but the government would find it hard to impose tough measures needed to tax farm income, boost exports, reduce spending and cut short-term debt.

Pakistan's donors remain concerned about the balance of payments, despite a better trend, with exports growing 14.8 per cent in the first two months of 1996-97 (July-June), against the year-ago period, and imports rising only 1.6 per cent.

Pakistan is still running a trade deficit of around $200 million a month, which is worrying and puts pressure on the reserves, but we are not expecting a default or even a restructuring, one Western diplomat said. I think they will manage.