Singapore: Standard & Poor's Ratings Services (S&P) has said that the sovereign credit ratings on Pakistan (foreign currency B+/Negative/B; local currency BB/Negative/B) could be lowered, if the assassination of Benazir Bhutto precipitates heightened levels of violence and political turmoil.
The death of former prime minister Bhutto, one of the main political contenders in the upcoming general elections, is a significant blow to Pakistan's transition to democratic rule, and leaves a considerable political vacuum in Pakistani politics. It therefore casts doubts on whether general elections scheduled for Jan. 8, 2008, will proceed, while violent reactions by supporters could potentially spark escalating civil disorder.
Standard & Poor's said that the prevailing negative outlook on the ratings on Pakistan encapsulates, to a large extent, risks to the political process, including attempts on the life of political leaders after a number of such incidents in the past. Hence, the assassination in itself will not result in a rating action. However, a further weakening of Pakistan's institutions, in conjunction with rising levels of violence and disorder, and the postponement of the 8 January 2008 elections would lead to a rating downgrade.
The agency also cautioned that a prolonged political stalemate or social disorder would make the rating vulnerable, primarily from an external liquidity and fiscal angle. Foreign direct investment and portfolio flows would most likely decline, negatively affecting Pakistan's external liquidity position, given its large current account deficit of about 4.8 per cent of GDP. In parallel, the sovereign may encounter increasing difficulty in refinancing its external and domestic debt, as lenders' risk aversion toward Pakistan increases.
Additionally, S&P says fiscal slippages may arise, pushing deficits beyond the government's target 4 per cent of GDP, and jeopardising the currently favourable debt trajectory.
In the short term, however, a potential escalation of violence and wide scale social upheaval could impair the sovereign's administrative capacity and interfere with its day-to-day operations.
(See: Benazir Bhutto's assassination unsettles stock markets)