Pakistan's Rating Cut by S&P, on Debt Payment Concern

By Steven McPherson and Khalid Qayum

Oct. 6 (Bloomberg) -- Pakistan's credit rating was cut by Standard & Poor's, which cited doubts about the country's ability to meet $3 billion in debt-servicing costs in the coming year.

The nation's long-term foreign currency rating was cut two levels to CCC+ from B, with a negative outlook, the U.S. rating company said in a report today. The rating may be lowered further if the government fails to stop the growing external imbalances, the report said.

``The downgrade comes in the wake of continued steep erosion of Pakistan's external liquidity position, the extent and pace of which casts rising doubts'' about the country's ability to meet about $3 billion of external debt servicing commitments, the report said.

Pakistan's President Asif Ali Zardari is seeking $100 billion to overcome the nation's economic crisis, the Wall Street Journal reported last week. The funds will help stop the outflow of capital from the country each time there is a bomb blast and it will build business confidence, Zardari said, according to the report.

``The negative outlook reflects our expectation that multilateral and bilateral aid, including deferred oil payment schemes, may not be timely enough, or sufficient in magnitude to stem the loss of external liquidity,'' S&P said today.

Riskiest Borrower

Pakistan is the world's riskiest government borrower, according to credit-default swap prices from CMA Datavision with investors concerned by a deterioration in security that saw 53 people killed in a bomb attack on the Islamabad Marriott hotel last month.

The nation is running short of money to repay state debt. Standard & Poor's estimated that Pakistan's foreign-exchange reserves have dropped 67 percent in the past year to about $4.7 billion.

Karachi's KSE100 Index has lost more than a third of its value this year and the rupee has fallen 27 percent.

Credit-default swaps on Pakistan's $2.7 billion of dollar- denominated bonds outstanding jumped to 2,050 basis points on Oct. 3. That means it costs $2.05 million a year to protect $10 million of the country's debt from default for five years, according to data compiled by Bloomberg.

Pakistan's balance of payment deficit increased six-fold in the first two months of the year that started July 1 to $2.5 billion and the current account deficit reached 1.6 percent of the $150 billion gross domestic product, the report said.

``Pakistan's balance of payments is under significant and rising pressure, whereby existing structural trade imbalances are magnified by exogenous price shocks,'' S&P said. Capital inflows are ``increasingly deterred by the prolonged political uncertainty and adverse security climate.''

To contact the reporter responsible for this story: Khalid Qayum in Islamabad at kqayum@bloomberg.net.