S&P upgrades Pakistan's currency from stable to positive
19 December 2006
Mumbai: Standard & Poor's Ratings Services today affirmed its 'B+' foreign currency and 'BB' local currency long-term ratings and its 'B' short-term sovereign ratings on the Islamic Republic of Pakistan (Pakistan). At the same time, it revised the outlook on the local currency ratings to positive from stable, while affirming the positive outlook on the foreign currency ratings.
"The outlook revision on the local currency ratings to positive from stable is motivated by the government's renewed efforts to finance more of its fiscal gaps through local currency bond issues after a period of suspension," said Standard & Poor's credit analyst Agost Benard. He further said, "The resumption of treasury bond auctions, and the extension of the yield curve to 20 years, will benefit domestic capital markets, extend the average maturity of the government's rupee-denominated debt, and will go some way toward alleviating the need for central bank deficit financing."
"The ratings on Pakistan take into account its favourable macroeconomic policy environment and improved real GDP growth prospects. "Pakistan's generally prudent economic management and strong policy environment, which over the past several years has consistently focused on structural and institutional reforms, is translating into better growth prospects," noted Benard.
Trade liberalisation and extensive privatisation are generating productivity improvements, and attract a rising amount of foreign direct investment, much of it greenfield. As a result, the country is poised for a period of sustained high growth of around 7per cent per year, helping to alleviate poverty and make further inroads in debt reduction.
The ratings remain constrained, however, by a high level of public and external leverage, and fiscal inflexibility owing to an exceedingly narrow tax base. "This fiscal constraint limits much-needed public infrastructure investment, and hampers the effectiveness of monetary management, given that the practice of deficit financing by the central bank still prevails," said Benard.
"Government revenues are estimated at 14.7 per cent of GDP for fiscal year 2007, while the country's stubbornly low tax-to-GDP ratio of just 10.4 per cent is not expected to improve materially with the modest revenue-raising initiatives of the 2007 budget. Gross general government debt to revenues should therefore remain at around 380 per cent, well in excess of the median 200 per cent for similarly rated countries.
"The longer-term challenge will be for the government to expand and deepen reforms of its tax system to raise government revenues significantly from the current level, and to demonstrate that the current pro-market, pro-growth set of policies will be sustained during successive administrations," Benard concluded.