S&P downgrades Pakistan rating

NEW YORK, July 15: Standard & Poor (S&P), a leading global credit rating agency, has downgraded its long-term foreign currency cr...

NEW YORK, July 15: Standard & Poor (S&P), a leading global credit rating agency, has downgraded its long-term foreign currency credit rating and its senior unsecured rating on Pakistan to triple C’ from single B-minus’, citing fears of default and a liquidity squeeze brought on by international sanctions.

Its short term foreign currency rating was maintained at single C’. The agency said yesterday the ratings would remain on its credit watch — where they were placed on May 22, 1998 — with negative implications. It added that the downgrade "reflects the increased likelihood of a sovereign default in the third quarter." The assessment found that sanctions imposed by western industrial powers on Pakistan in response to Pakistan’s nuclear tests "could cut disbursements of new external assistance by $ 1.5 billion in the 12 months." At the same time, more than two billion dollars in external interest principal payments come due within 3 months.

The agency pointed to capital flight, a decline in remittancesfrom Pakistani workers abroad and country’s inability to raise sufficient funding from other Islamic countries to close an external financing gap. Official international reserves, excluding gold, have fallen to around $ 740 million from $ 1.4 billion six weeks ago.

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But, according to Standard and Poor’s default could be avoided if Group of Eight — Britain, Canada, France, Germany, Italy, Japan, Russia and the United States — modified sanctions against Pakistan and put together a "fast disbursing rescue package." S&P expressed its apprehensions about Pakistan that on current debt servicing trends, central bank reserves will be depleted within two months and hence "the forced rescheduling of sovereign external liabilities had become serious problem policy option".

After this downgradation, Pakistan would be really hard pressed to meet its external debt liabilities which is approximately two billion dollar worth of external interest and principal amount due within the next three months.

On the other hand,foreign exchange reserve of the country could be wiped out fully within the next two months in the absence of any further external loans.