Standard & Poor's Ratings Services has assigned 'B+' (Bee Plus) senior unsecured foreign currency debt rating to Pakistan's (foreign currency B+/Positive/B; local currency BB/Stable/B) proposed global bond issue of up to one billion dollars, according to a report from Singapore.
The proposed bond will have a maturity of seven to 10 years. The sovereign credit ratings on Pakistan reflect strong economic growth, supported by a consistent and reform-oriented policy environment, balanced against prevailing high public debt and low fiscal flexibility.
"The government's ongoing reform and restructuring programme is increasing Pakistan's competitiveness. Average per capita gross domestic product (GDP) growth is expected to remain well above four percent in the medium term," said Standard & Poor's credit analyst Agost Benard.
"Structural improvements, together with sharp declines in the government's external debt indicators, help Pakistan's overall growth prospects, and underpin the rating and positive outlook for the foreign currency rating."
The ratings on Pakistan are constrained by the apparent lack of robustness of its fiscal and monetary stance in the face of ongoing inflationary pressures.
The government has taken repeated recourse to central bank financing of its budget deficits, with central bank holdings of government securities reaching over half of the monetary base in February. Unless the government takes additional steps to boost revenue or cut expenditure, Pakistan's general government fiscal deficit is likely to rise above four percent of GDP in the fiscal year ending June 30. This includes earthquake-related spending at an estimated 0.6 percent of GDP, which will be financed with concessional loans. The deficit stood at 3.3 percent of GDP in the previous fiscal year.
Real interest rates remain slightly negative, although inflation appears to have peaked at 11 percent in the second quarter of 2005 and would end this year at about eight percent.
"The longer term challenge will be for the government to capitalise on its recent tax reforms and the passage of a fiscal responsibility law by raising government revenues significantly from its current level of 14 percent of GDP. In addition, the government will need to demonstrate that the current pro-market, pro-growth set of policies will be sustained during successive administrations," he said.
The ratings could improve if the government could sustain structural reforms, deepening a cycle of economic growth, job creation, and falling debt burden.
Pakistan's credit standing could also improve if public finances are further tightened by widening the tax base, improving compliance, and making public expenditure more efficient in raising the living standards, the report said.
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