Moodys Downgrades Pakistan

The downgrade set off an immediate selling spree at the Karachi Stock Exchange, where the 100-share index had plunged 55.36 points, or 3.5 per cent, to 1,524.88 by midday.

The market has taken this as a signal that foreign buying will remain on hold for the moment, said Ali Asghar, a dealer with Fortune Securities. On Wednesday, the index rose 78.48 points, or 5.2 per cent, to end at 1,577.25, boosted by President Farooq Legharis abrupt dismissal of Bhuttos three-year government the day before.

But dealers said the decision by Moodys Investors Services to lower Pakistans sovereign ceiling for foreign currency loans to B2 from B1 and its ceiling for foreign currency bank deposits to B3 from B2 would rock the market.

 

This news is going to take the wind out of stocks for sure, dealer Sajjad Mankani of BMA Capital Management said.

Nauman Sheikh, senior analyst at brokers KASB & Co., said the downgrade had come as no suprise.

Given the sort of economic crisis we were facing, this was pretty much expected, he said.

Moodys said the cut reflected the increased fragility of Pakistans liquidity position and the severe pressure that the large domestic and foreign currency debt burden exerts on public finances, the external accounts, and official reserves.

Pakistans foreign reserves, including gold and special drawing rights, fell to $1.262 billion in October from $1.865 billion in September, against $1.963 billion in October 1995, the State Bank of Pakistan said. The reserves included $543 million within Pakistan and $30 million outside.

Sheikh said the ratings cut showed that Moodys had opted for caution, despite hopes that the caretaker government might clinch a new accord with the International Monetary Fund.

The IMF deal will have little impact on the economic situation in the short term, unless Pakistan manages to give concrete results, he said.

Pakistan unveiled an IMF-inspired package on October 22, narrowing the budget deficit by 40 billion rupees ($995 million) this year by spending cuts, new taxes and a fuel price rise.

The same day the central bank devalued the rupee by 7.86 per cent against the dollar and raised its key repurchase (repo) discount rate to 20 per cent from 17 per cent a year.

A senior foreign banker said Moodys latest downgrade would make it harder for banks to bring in much-needed foreign currency deposits from abroad. The number of creditors was already down. This news will further cut lending to Pakistan and whatever flows in will be very expensive, he said.

The SBP annual report for the 1995-96 financial year (July-June) said total oustanding external debt had reached $28.603 billion against $27.072 billion in 1994-95. The 1995-96 foreign debt accounted for 44.1 per cent of gross domestic product, 52.2 per cent of export earnings and 33.9 per cent of the total foreign exchange earnings, SBP said.

Analysts say that external debt servicing is projected to exceed $5 billion in 1996/97 and shoot well above 30 per cent as a percentage of foreign earnings.

The SBP said short- and medium-term foreign debt reached $5.528 billion in 1995/96, or 19.3 per cent of total foreign debt. It put debt servicing on this account at $2.163 billion.