Economic Problems in Pakistan may take time to be resolved
Pakistan's pressing economic problems could take a back seat as officials are caught up in the succession of President Pervez Musharraf, and this could have credit rating implications, a top Standard and Poor's executive said on Monday.
Musharraf's stepping down on Monday solved one dimension of the political crisis, but the country still had to grapple with a host of issues, including who will replace him, said David Beers, S&P's global head of sovereign ratings based in London.
"There are a lot of questions that remain unanswered about what happens with President Musharraf leaving office, which still, we're concerned, would keep the authorities totally preoccupied with these political issues and their eye continuing to be off the ball with these pressing fiscal and economic policy issues," he said.
Pakistan's escalating budget deficit and a large current account deficit in the balance of payments drove S&P in May to cut the country's credit rating to "B", with a negative outlook, which tells the market the rating could go lower.
Musharraf resigned to avoid impeachment charges, nearly nine years after taking power in a coup. He had been politically isolated since his allies lost parliamentary elections in February. The opposition coalition that took over the legislature seemed to have no unified economic policy.
"They have some very pressing economic policy issues to start dealing with," Beers said. "We don't have a sense that there is anything like a consensus within the government on how to get on top of this - that's a precarious situation to be in." The single B credit rating for Pakistan's sovereign debt is towards the low end of S&P's scale - deep into speculative-grade "junk" bond territory.
Pakistan shares its single B credit rating with countries like Argentina, which earned a black eye in foreign financial circles for its 2002-2005 default on $100 billion in debt. Moody's rates Pakistan at B2, one notch above Argentina. Lower credit ratings can raise a country's borrowing costs and hamper its efforts to tap international credit markets
Asked about the prospects for a rating change for Pakistan, Beers said: "We'll see whether the government in the coming weeks or months puts together a credible package of economic policies and that will tell us whether the rating is OK where it is or not." Prolonged jockeying and uncertainty over Musharraf's position has hurt financial markets in the nuclear-armed country of 165 million people.
The stock market rallied 4.5 percent on Monday but is still near two-year lows. Pakistan's rupee has slumped nearly a third since April, and the currency is near historic lows. "I think the pressure on the currency comes from both domestic and international sources," Beers said. The country was "hemorrhaging" foreign exchange, he said, and foreign investors were pulling out of its stock market.
"They have a very large current account payments deficit which they are having a problem financing," he said. "They (Pakistan) have not been borrowing as market conditions, obviously in line with our rating, have not been favorable."
The current account is a country's broadest measure of foreign transactions and a deficit can spell lower reserves if there are no offsetting capital inflows. S&P estimated the budget deficit in the just-ended fiscal year ballooned to 8 percent of the gross domestic product - double that budgeted by Musharraf, Beers said.
His resignation "solves one dimension of the political crisis which has been underway now for many months," he added. "But it doesn't necessarily signal in our view a dramatic change for the better in terms of the broader risks that we think are weighing on the credit rating.
Musharraf's stepping down on Monday solved one dimension of the political crisis, but the country still had to grapple with a host of issues, including who will replace him, said David Beers, S&P's global head of sovereign ratings based in London.
"There are a lot of questions that remain unanswered about what happens with President Musharraf leaving office, which still, we're concerned, would keep the authorities totally preoccupied with these political issues and their eye continuing to be off the ball with these pressing fiscal and economic policy issues," he said.
Pakistan's escalating budget deficit and a large current account deficit in the balance of payments drove S&P in May to cut the country's credit rating to "B", with a negative outlook, which tells the market the rating could go lower.
Musharraf resigned to avoid impeachment charges, nearly nine years after taking power in a coup. He had been politically isolated since his allies lost parliamentary elections in February. The opposition coalition that took over the legislature seemed to have no unified economic policy.
"They have some very pressing economic policy issues to start dealing with," Beers said. "We don't have a sense that there is anything like a consensus within the government on how to get on top of this - that's a precarious situation to be in." The single B credit rating for Pakistan's sovereign debt is towards the low end of S&P's scale - deep into speculative-grade "junk" bond territory.
Pakistan shares its single B credit rating with countries like Argentina, which earned a black eye in foreign financial circles for its 2002-2005 default on $100 billion in debt. Moody's rates Pakistan at B2, one notch above Argentina. Lower credit ratings can raise a country's borrowing costs and hamper its efforts to tap international credit markets
Asked about the prospects for a rating change for Pakistan, Beers said: "We'll see whether the government in the coming weeks or months puts together a credible package of economic policies and that will tell us whether the rating is OK where it is or not." Prolonged jockeying and uncertainty over Musharraf's position has hurt financial markets in the nuclear-armed country of 165 million people.
The stock market rallied 4.5 percent on Monday but is still near two-year lows. Pakistan's rupee has slumped nearly a third since April, and the currency is near historic lows. "I think the pressure on the currency comes from both domestic and international sources," Beers said. The country was "hemorrhaging" foreign exchange, he said, and foreign investors were pulling out of its stock market.
"They have a very large current account payments deficit which they are having a problem financing," he said. "They (Pakistan) have not been borrowing as market conditions, obviously in line with our rating, have not been favorable."
The current account is a country's broadest measure of foreign transactions and a deficit can spell lower reserves if there are no offsetting capital inflows. S&P estimated the budget deficit in the just-ended fiscal year ballooned to 8 percent of the gross domestic product - double that budgeted by Musharraf, Beers said.
His resignation "solves one dimension of the political crisis which has been underway now for many months," he added. "But it doesn't necessarily signal in our view a dramatic change for the better in terms of the broader risks that we think are weighing on the credit rating.
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