Financial Risk Manager

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S&P raises FC rating on Pakistan to CCC+
Friday, December 19, 2008

Standard & Poor's Ratings Services raised its long-term foreign-currency sovereign credit rating on the Islamic Republic of Pakistan to 'CCC+' from 'CCC', and affirmed the 'CCC+' long-term local-currency rating. The outlook on the long-term rating is developing.
Standard & Poor's also affirmed its 'CCC+' issue rating on Pakistan's senior unsecured local-currency debt and the 'B-' transfer and convertibility (T&C) rating on Pakistan. We raised the issue rating on the sovereign's senior unsecured foreign-currency debt to 'CCC+' from 'CCC'. Likewise, we lifted the foreign-currency issue rating on Pakistan International Sukuk Co. to 'CCC+' from 'CCC'.
The upgrade of Pakistan incorporates the disbursal of the first tranche (US$3.1 billion) of the US$7.6 billion International Monetary Fund (IMF) loan facility in November 2008. The disbursal appears to have stabilized the sovereign's foreign reserve position, substantially alleviating the prospects of near-term debt service stress. Moreover, we take comfort from the explicit recognition of all debt service needs in a Letter of Intent to the IMF.
In addition, the upgrade takes into account positive expectations on improving macroeconomic stability and external liquidity in light of the comprehensive set of stabilization policies to which Pakistan has committed itself under the IMF's Stand By Arrangement (SBA) loan facility. By providing a robust policy framework for achieving fiscal and external sustainability, the program should unlock additional material support from various multilateral and bilateral sources, which in turn further moderate prospects of external payment distress.
The current sovereign credit rating level of 'CCC+', however, takes into account the considerable risks to implementation, given Pakistan's fluid domestic political situation, where an unstable coalition is confronted with numerous domestic political and security challenges. Against this background and a highly politicized and partisan environment, policy making and implementation may become derailed. This could lead to missed program targets, as has happened in the past under previous IMF programs.

Labels: Treasury