Standard & Poor's ratings agency cut Pakistan's sovereign rating on Thursday, citing increasing pressure from expanding budget and trade deficits against a volatile political setting. The move came as no surprise to analysts, who have long been warning about deteriorating economic fundamentals and policy paralysis in the South Asian economy, or to investors who have driven the rupee down to record lows. Standard & Poor's cut Pakistan's long-term foreign currency debt rating to B from B+ and its long-term local currency rating to BB- from BB. The outlook is negative, S&P said. The country's five-year credit default swaps - or insurance-like contracts that protect against defaults or restructuring - were quoted 475/575 basis points, wider by 25 basis points. Traders said the contract was very illiquid but said they expected further widening following the downgrade. The rupee was quoted at 69.10 to the dollar, close to last week's record low, while the Karachi stock index was 0.8 percent weaker at 14,479.87. “This cannot be a surprise, unfortunately,” said Tim Condon, head of Asian economic research at ING. “From the rating agency's perspective, if the politics has really undermined the economic fundamentals to a degree, they have to take action.” “More than the ratings cut, the negative outlook is going to hurt the government's ability to raise foreign debt, especially at a time when they are trying to refill their dollar reserves,” said Asad Iqbal, managing director at Ismail Iqbal Securities. Pakistan last ventured into the international debt market in May 2007. Political turmoil has forced the country to put plans for another sovereign bond issue this year on the backburner. ING's Condon said the government might just have to consider asking the multilateral agencies such as the IMF for more funding, since raising money from markets was going to be a lot more expensive. “The negative outlook reflects our assessment that the sovereign's vulnerabilities may accentuate further, given that the emergence of a stable, cohesive and effective physical environment needed to tackle mounting macroeconomic imbalances doesn't seem to be at hand,” said S&P credit analyst Agost Benard in a statement. The nuclear-armed country has been through a tumultuous 14 months since President Pervez Musharraf tried to dismiss the top judge in March last year. The crisis was followed by emergency rule and then general elections in February. Things took a turn for the worse this week, threatening the newly formed four-party coalition government, after former prime minister Nawaz Sharif, who heads the second biggest party in the group, said on Monday his members were quitting. Meanwhile, the economic situation has gone downhill. Annual inflation, at more than 17 percent, is at its highest in more than three decades, the current account gap has widened, and government spending has caused the budget deficit to balloon. The stock market is down 2 percent this year. “This will have a negative impact on the market, we are already seeing foreign selling everyday and will probably add more pressure,” said Shuja Rizvi, director broking at Capital One Equities. The rupee has shed 12 percent this year, forcing the central bank to intervene in the past few days. “If you have a stronger government and proper policy responses, these economic challenges could be better dealt with,” said Hong Yang-myung, sovereign analyst with Lehman Brothers. “But it seems the current problems with the coalition, it's going to be difficult.”
