Pakistan Debt Outlook Lowered to Negative by Moody's

By Steve McPherson and Kartik Goyal

Sept. 23 (Bloomberg) -- Pakistan's credit outlook was cut to ``negative'' by Moody's Investors Service, which said the country may face difficulties repaying foreign debt.

Moody's lowered its outlook from ``stable'' on the South Asian nation's government bond rating of B2, which is one level below Turkmenistan and Cambodia. Standard & Poor's also has a ``negative'' outlook on Pakistan debt.

Pakistan's foreign reserves have almost halved in the past year and the budget deficit has ballooned to a 10-year high as spending on food and fuel subsidies and the military has outpaced state revenue. The rupee has slumped to a record low since Moody's and S&P cut the country's ratings for the first time in nine years in May.

``The deterioration in the economic environment in Pakistan continues and this won't be the last downgrade,'' said Tim Condon, chief Asia economist at ING Groep NV in Singapore. ``The widening fiscal deficit and current-account deficit makes the situation very, very challenging.''

A weekend bomb attack that killed 53 people at the Islamabad Marriott hotel less than a month after the election of Asif Ali Zardari as president underscored the deterioration in security in Pakistan that has spooked investors this year.

Zardari's government plans to sell state assets and cut subsidies for power and fuel to help revive a sliding economy that's forecast to grow at the slowest pace since 2003 and bridge the budget deficit, which is at a 10-year high.

`Underlying Tensions'

``After the election of President Zardari, domestic political stability may improve somewhat, but underlying tensions will be difficult to remedy,'' Aninda Mitra, Moody's sovereign analyst for Pakistan, said in a report. The cuts were ``prompted by a substantial erosion in the country's external liquidity position.''

The rupee gained 0.1 percent to 78.15 a dollar as of 11:50 a.m. in Karachi, according to data compiled by Bloomberg. The currency slumped 0.4 percent yesterday to 78.225, the lowest level since at least December 1988.

The KSE100 Index was little changed at 9,199.09, supported by emergency trading curbs imposed last month that prevents the benchmark falling below at 9,144.93.

The Karachi Stock Exchange Ltd. will tomorrow ban short selling of equities for a month, a day before the exchange's board is due to review the trading curbs. The KSE100 has halved in value this year, behind only China and Vietnam as Asia's worst-performing benchmarks.

Oil Imports

Rising payments for importing oil have widened the balance- of-payments deficit to $2.57 billion in the July-August period from $1.57 billion a year earlier. The shortfall in the current account reached a record $14 billion in the year ended June 30.

Pakistan's central bank raised its benchmark interest rate by one percentage point to 13 percent on July 29, the third increase in 2008, to ease inflation that reached a 30-year high last month.

Higher borrowing costs and runaway inflation are damping growth in the $144 billion economy. The pace of expansion is expected to slow to 4.5 percent this fiscal year from 5.8 percent in the previous 12 months, the Asian Development Bank said in a report last week.

To contact the reporters on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net; Steve McPherson in Tokyo at smcpherson@bloomberg.net