Moody’s downgrade

The financial capital markets are a brilliant tool to facilitate investment into an economy’s businesses. Pakistan’s bourses, however, are not well integrated into the rest of the economy. A sad fact except for when the whole market crashes. In such a scenario, there is nothing lost for most people, but the state of affairs in nothing to be proud of either.
Scale this situation up, and you get our situation with the global capital markets. This week’s downgrade of Pakistan’s sovereign credit rating by Moody’s (one the world’s three most respected rating agencies) is undoubtedly bad. But it won’t immediately affect things on the ground on account of the fact that financing from the global capital markets isn’t enough to upset things. Our rating moved from one category of junk to another, worse category of junk.
But it is not as simple as that. True, the credit rating downgrade won’t cause a change in and of itself because we are not seeking credit from outside but what about the psychological triggers? The currency markets might be affected. Also some investors and importers alike do tie such variables in their risk assessment calculus.
Moody’s do have a specific algorithm with which they calculate their ratings. The other agencies have their own. The differential weights (or inclusion to begin with) of certain variables over others give differing ratings. Amongst the set of variables that Moody’s use is that of political stability. We have recently sent an elected prime minister packing. His successor seems set to follow him as well. This obviously would not bode well in any assessment of political stability. The government is no doubt guilty of economic mismanagement but the credit downgrade was also contributed to by other state institutions prioritising certain issues over almost everything else. And governments with competence issues do even worse than they otherwise would have if they are to constantly watch over their shoulders for attempts to wrest control away from them.