The rating agency Standard & Poor's has lowered its outlook on Pakistan's credit rating, citing worsening security and the risk of a budget deficit target overshoot. S&P has lowered its outlook to 'stable', from 'positive', and maintained the 'B+'/'B' foreign currency ratings and the 'BB'/'B' local currency rating for the country's sovereign debt.
"Pakistan's political and security situation has deteriorated markedly in recent months," said Standard & Poor's credit analyst Agost Benard. "This period of increased uncertainty has been marked by violent social unrest relating to the removal of the country's chief justice, Islamabad's Red Mosque siege, and the latest assassination attempt on President Musharraf's life."
He said that an expansionary budget for the current financial year made the country's fiscal position vulnerable, given the government's high debt and debt-service burden.
Karachi shares touched a life high as Pakistani troops stormed the mosque compound in the capital, ending a week-long stand-off which left up to 50 dead. But the market later retreated and the main index slipped 0.74 percent from Monday's close.
The rupee currency was little changed at 60.40/60.42 rupees to a dollar.
Analysts said that markets have already largely priced in political and financial risks.
"People invested in Pakistan knew that the political situation would destabilise to a great extent," said Zubair Hussain, head of equity sales at KASB Securities. "The political noise was expected to go up as elections drew near. This has been factored in by those investing here."
Pakistan has attracted a lot of international investor attention as the economy grew at an average annual rate of 7 percent over last five years and the government wants to maintain that pace in the 2007-08 fiscal year.
But there are fears that the economy could slow as Musharraf goes through the most severe challenge to his authority since he came to power in a military coup eight years ago.
Musharraf, who plunged the country into a crisis three months ago by suspending the country's top judge, survived an assassination attempt this month as shots were fired at his plane. "The political uncertainties are the problem but then that's why it's rated B-plus," said a Singapore-based economist with a US investment bank.
He also said that fiscal slippages were temporary and the risk of financial shortfalls was proportionate to the B rating category.
S&P said that although the country's fiscal budget had aimed for a 4.0 percent deficit target this year compared with last year's 4.2 percent, there was a risk of an overshoot because a possible revenue shortfall would be tough to offset via spending cuts, especially in an election year.
However, analysts said there were other ways to mitigate this risk. "The concern on fiscal slippages and deficit is quite high. But we feel it is manageable given the government's aggressive privatisation," said KASB's Hussain.