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  • Feb 7th, 2004
  • Comments Off on $500 million Eurobond assigned ‘B’ and B2 ratings
Standard & Poor's Ratings Services on Friday assigned 'B' long-term senior unsecured foreign currency debt rating to Pakistan's proposed issuance of $ 500 million fixed rate bonds due in 2009.

Moody's Investors Service has also assigned its B2 rating to the pending 5-year eurobond issue by the Islamic Republic of Pakistan.

Standard & Poor's sovereign credit ratings on Pakistan are: foreign currency 'B/B' and local currency 'BB-/B'.

The outlook is positive.

"The ratings on Pakistan are supported by its comfortable external liquidity, and progress made in economic stabilisation," said Standard & Poor's credit analyst Chih Wai Liew of the Sovereign and International Public Finance Ratings Group.

Progress on the extensive structural reform agenda is largely on track, although still incremental. This progress comes despite a lack of public support, a difficult external environment and domestic political uncertainties. "Since coming to power about 15 months ago, Prime Minister Jamali's coalition government has generally remained steadfast in practising prudent economic management," said Liew.

Pakistan's economy outperformed expectations by registering real GDP growth of 5.8 percent in fiscal year 2003--the fastest since fiscal 1992. The higher growth reflects cyclical factors, particularly favourable rainfall, and growing domestic confidence.

Inflation has declined to 3.1 percent, the lowest in more than a decade, and external liquidity improved, with foreign exchange reserves exceeding $ 10 billion since September 2003.

"Investor confidence and economic stability have also been boosted by the reduction in Pakistan's general government deficit (excluding grants) to 4.4 percent of GDP in fiscal year 2003, a 27-year low," Liew added.

Looking ahead, ratings could improve if the government could sustain structural reform so as to create a virtuous cycle of economic growth, job creation, poverty reduction, and falling debt.

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

Conversely, any backtracking on reforms or fiscal slippage that would tilt the government's debt trajectory upward again could result in renewed downward pressure on the ratings.

MOODY'S RATING: Reuters adds from New York: Moody's Investors Service has assigned its B2 rating to the pending 5-year eurobond issue by the Islamic Republic of Pakistan.

The rating is equivalent to Pakistan's B2 country ceiling for long-term foreign currency bonds and notes and to the Pakistani government's foreign and local currency issuer ratings, which were last upgraded in October 2003. The outlook on all of Pakistan's ratings is stable.

Moody's points out that the new issue represents the country's return to the international capital markets for the first time since it restructured all of its previous eurobonds and floating rate notes at the insistence of the Paris Club of bilateral creditors in December 1999.

Moody's states that a positive turnaround has taken place in the Pakistani economy over the past five years. Economic reforms that had languished during the political turmoil of the 1990s were implemented with a fresh sense of urgency following the military coup in October 1999.

Policymakers began to implement a comprehensive adjustment program aimed at reversing the upward trajectory of public and external debt accumulation in order to escape a recurring cycle of balance of payments crises.

The effort comprised fiscal consolidation, banking sector and energy sector reform, the privatisation of state-owned companies, poverty reduction, and the normalisation of relations with multilateral institutions and bilateral creditors, which helped to secure a new IMF programme and another bilateral debt restructuring.

Moody's points out that the country's external situation remained complicated in 1999-2001, however, because of the imposition of international trade and aid sanctions after the May 1998 nuclear tests.

At the end of 1999, additional sanctions were imposed by some countries on the military government, which suspended and later dissolved the civilian legislature, reorganised the judiciary, and instituted controversial changes to the constitution.

In the context of a severe external financing shortfall at this time, Pakistan was forced to implement the "comparability of treatment" provision specified in the January 1999 Paris Club Agreed Minute in order to obtain new multilateral loans and another Paris Club restructuring.

Pakistan reached an agreement with the London Club of commercial bank creditors to extend the maturities of its foreign bank obligations on this basis.

In December 1999, the government also rescheduled its three outstanding foreign currency bond and note issues.

These securities, one issue of which was originally scheduled to mature that same month, were exchanged for new six-year Notes carrying a three-year grace period.

After the September 11 terrorist attacks in the United States, Pakistan aligned itself diplomatically with the US and its allies regarding the overthrow of the Taleban government in Afghanistan.

Moody's says that this realignment helped Pakistan to gain extremely generous terms in a new debt restructuring from the Paris Club as well as outright debt forgiveness from the US and other creditor nations subsequently.

The "comparability of treatment" provision remains in effect. Most remaining international sanctions were removed around the time of national and provincial parliamentary elections in October 2002, and Pakistan won increased trade access to the US, Europe, and Japan.

However, relations between the President (also Chief of Army Staff) Musharraf and the new national Parliament have been highly contentious until recently.

Following the long negotiations with the parties in opposition, the constitutional issues with reference to the Legal Framework Order (LFO) have been amicably settled. On January 1, 2004, General Musharraf received a vote of confidence in the electoral college consisting of the members of parliament and the house of provincial assemblies. Having obtained this vote of confidence, General Musharraf has been confirmed as President for a term of 5 years under the constitution.

Moody's underscores the fact that Pakistan's domestic growth has responded positively to macroeconomic reform and stabilisation, and particularly to the improvement in its external liquidity provided by ample external assistance, faster export growth, and a healthy pickup in workers remittance inflows during the past two years.

Pakistan's traditional balance of payments constraint has been significantly alleviated as the current and capital accounts of the balance of payments shifted from deficit into surplus, with $10.5 billion in official foreign assets presently.

Moody's has recognised the steady improvement in creditworthiness with upgrades of the government's long-term ratings in each of the last two years. Moody's stresses that Pakistan's ratings are constrained by a number of structural factors, however, both economic and political.

Public debt is still quite high and living standards are relatively low compared to other countries in the "B" rating category. Even after the debt relief obtained in recent years, interest payments and defence consume over half of government revenue, restricting the government's ability to redress persistent poverty and underdevelopment.

Moody's remains concerned about Pakistan's domestic political tensions, although the parliamentary agreement over the LFO marks an important turning point in relations among the formal political parties and with the President.

The multiple assassination attempts against President Musharraf, apparently mounted by terrorist factions within the society, are also worrying given the importance of stable governance to continued progress on economic reform and to the peace initiative with neighbouring nuclear rival India.

In the event that the bilateral peace negotiations can meaningfully reduce regional antagonisms, the potential exists for a reallocation of scarce resources from defence to social welfare programs in both countries.

Copyright Business Recorder, 2004


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