S&P releases report on Asia-Pacific Sovereigns


Standard & Poor’s, one of the two biggest global rating agencies, released a report on Tuesday on the “Asia-Pacific Sovereigns,” labelling it as “mixed outlook in an uncertain year”. Analyst, Agost Benard, who follows Pakistan for S&P warns, “We could lower the rating, if major slippages in policy occur, resulting in renewed balance-of-payments difficulties or rising public debt trajectory.” He asserts, “While the upside potential is currently limited in our assessment, we could raise the rating if Pakistan shows progress in its fiscal consolidation efforts, evident through moderating fiscal deficits and a steady reduction in public debt.”
Pakistan has been rated at B-/Stable/C; T&C B-, Recovery 3. The last rating/outlook change was done in Aug 24, 2009, when the rating was raised to ‘B-’ from ‘CCC+’ with a stable outlook. S&P said it continued albeit slower economic growth in 2012 (in the region) which was one reason for its stable outlook on a majority of Asia-Pacific sovereign ratings.However, it expected challenging global outlook to be complicated by domestic political issues in the year ahead. The rating agency covers more than 20 countries in the Report, including Pakistan. In regard to his comments on Pakistan politics, the analyst clearly needs to be updated. He cited major ‘weaknesses’ as “Political instability and security risks.” The analyst says the “Near-term risks of major political instability have risen over the past several months as a three-way tussle between the judiciary, executive, and the military plays out. In an apparent effort to assert its independence, the Supreme Court has indicted Prime Minister Yusuf Raza Gilani for contempt of court for not acting on a ruling to reopen corruption charges against incumbent President Asif Ali Zardari.” And S&P analyst goes on to speculate “If the proceedings result in Mr Gilani being forced out of office, it would not necessarily result in the collapse of the government, in our view. However, already-low government effectiveness would weaken further, and the likelihood of early elections, which are scheduled for 2013, would increase.”
In regard to the country’s economy, S&P analyst, Agost Benard reported that the pressures on balance of payments that the rating agency had foreshadowed earlier were now becoming apparent, but the reserves cushion remained adequate for the time being. For the July–December 2011 period, the current account registered a deficit of $2.4 billion, compared with a surplus of $8 million for the same period a year before. While remittance rose by a healthy 19.5 per cent year on year for the period, this could not offset the 32 per cent expansion of the trade deficit.
In the capital account, FDI flows declined further, falling 36.6 per cent in the second half of 2011 to just $532 million. The overall balance of payments thus registered a deficit of $1.8 billion, compared with a surplus of close to $1 billion a year ago. In the year ahead, the current account should get a boost from the recent decision by EU to allow duty free access for 75 products from Pakistan for a two-year period. Debt service commitments for the one-year period from this January amounted to $2.4 billion (amortisation plus interest), which was a manageable burden against foreign reserves of $17.1 billion as of January 2012. External liquidity thus remained adequate, but could become a pressure point in the event of an exogenous shock or if donor inflows diminished, S&P observed and presented its ‘Outlook’ for Pakistan: “The stable rating outlook balances adequate external liquidity against vulnerability stemming from ongoing structural fiscal weaknesses and significant political and security risk”.