PKR likely to depreciate to 78 against US$ in two years

Moody's Investors Service has forecast that Pakistan currency is strongly expected to depreciate to Rs 78 against one US dollar over the next two years. According to the rating agency's analytical report released on Friday, the parity gap between the two countries is expected to widen to Rs 75.4/1$ in FY2009-10 from Rs 70/1$ in FY2008-09.
The Pak currency may be as low as Rs 78 against one US dollar by FY2010-11. The rating agency believes that Pakistan's overall balance of payments position will remain weak for he foreseeable future. Pressure on foreign currency reserves and PKR will remain high.
"Emergency assistance from key external allies (such as in the form of Saudi oil concessions), and possibly, accelerated disbursements of multilateral assistance may provide some financing respite, and stabilise sentiment, by bringing in $2billion to $3billion," the Moody's says and adds: "Nonetheless much stronger demand-management policies by monetary and fiscal authorities backed by institutional rules to limit (if not reverse) deficit magnetisation maybe needed to restrain domestic demand and reduce import growth."
While expressing optimism over country's overall external financial needs which, according to it, are still manageable, the rating agency notes that Pakistan's external credit fundamentals benefit from a debt composition that is predominantly long tenor and owed to bilateral and multilateral creditors on concessional terms.
As a result, the Moody's says, overall amortisations coming due amount to only $2billion to $3billion and are manageable in size even amidst the growing strains on the country's external liquidity profile.
"In the event of substantial PKR depreciation, debt ratios will undoubtedly worsen. But, even then, the marginally higher debt service payments are not expected to lead to unmanageable pressures on Pakistan's foreign exchange reserves. As a result, we are comfortable with a 'stable' outlook on the B2rating," the Moody's says.
Moody's believes that the key risk to the outlook is a failure of demand-management policies and exchange rate adjustments to rein in the size of Pakistan's external deficits. The rating agency has warned that if such adverse trends to be accompanied by further supply-side shocks or a worsening of fiscal credibility, the pressures on Pakistan's external liquidity and debt servicing ability could intensify much more than currently projected.