Standard & Poor's Ratings Services on Monday raised its long-term sovereign credit ratings on Pakistan by one notch to 'B+' (Single B Plus) for foreign currency, and 'BB' (Double B) for local currency. A release of S&P said that the upgrades reflected declining debt and debt-servicing burdens, as well as sustained economic progress. The rating actions also reflect Pakistan's (foreign currency B+/Stable/B; local currency BB/Stable/B) moderate external liquidity position.
Pakistan's macroeconomic conditions continue to improve because of responsible economic management and gradual structural reforms. Its economy has outperformed expectations by registering real GDP growth of 6.4 percent in fiscal year 2004 (ended June 30, 2004), the fastest in over 10 years. The higher growth rate reflected both cyclical factors, and growing domestic confidence, evident in consumption and investment growth. The outlook for GDP growth remains encouraging, thanks to recovery in the industrial sector and returning investment.
"The government has remained steadfast in generally prudent fiscal management, thereby raising investors' confidence," said Standard & Poor's credit analyst Ping Chew, Director in the Sovereign and International Public Finance Ratings Group.
"Pakistan's general government deficits are likely to be controlled at moderate levels, despite an expected widening in the deficit (excluding grant) in fiscal year 2005 to slightly above 3 percent, from 2.4 percent in fiscal year 2004. This will preserve the government's primary surpluses which, combined with privatisation proceeds, will lower the debt burden (as a ratio of GDP) further in the medium term. Its debt-servicing burden has likewise declined," Chew noted.
Careful husbandry of international reserves, at more than $12 billion at the end of September, 2004, gave rise to moderate external liquidity. Although strong domestic demand might lead to a current account deficit after four years of surpluses, reserves levels are still likely to cover gross financing needs twice.
The stable outlook reflects that further upward ratings trajectory will have to depend on even more rapid fiscal consolidation and economic improvements, and speedier implementation of reform programmes, given the structural weaknesses in the country.
The outlook also reflects the high political and associated economic risks. Ties with India, although having improved recently, could sour quickly. More permanent détente with India could bring about a sizeable peace dividend and more economic benefits, lifting Pakistan's growth prospects. If the existing economic achievements are built on going forward and deepened economic reforms successfully attained, the ratings could be upgraded, particularly if the political framework remains stable and relations with India improve.
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