<b>S&P downgrades Pakistan further into junk territory</b>
<b>HONG KONG : Standard & Poorâs cut Pakistanâs sovereign rating further into junk territory, saying the countryâs worsening external liquidity may imperil its ability to meet about $3 billion in upcoming debt obligations, FReuters reported.</b>
The widely expected action comes after Pakistan said on Saturday its foreign reserves fell $690 million to $8.1 billion in the week ended Sept. 27, an announcement that helped send the Pakistani rupee to a record low against the dollar on Monday.
The countryâs central bank, the State Bank of Pakistan, said its reserves fell to $4.7 billion from $5.4 billion previously, representing a little over two months of import cover.
S&Pâs downgrade of Pakistan was its second this year, as the country faces the prospect it will default on its debt due to dwindling foreign currency reserves.
Foreign investor confidence in the country has also been dented amid worries urgently-needed economic reforms will be delayed in a year plagued by political and security concerns.
S&Pâs action on Monday S&P lowered its foreign currency debt rating on the country to CCC-plus from B, just several notches above a level that would indicate default. Pakistanâs local currency debt rating was lowered to B-minus from BB-minus.
The ratings agency noted Pakistan will require external assistance in meeting its debt obligations â which includes $500 million in dollar bonds maturing in February â but expressed concern about whether it could count on the help in time.
S&P also noted the uncertain political situation and social tension cast doubt about whether the government would have the ability to adopt the appropriate policy measures.
âThe rating on Pakistan could be lowered further if the foreign exchange reserve cushion continues to shrink and meaningful economic stabilization measures remain wanting,â S&P warned in its statement.
Rival credit agency Moodyâs Investors Service last month cut its outlook on Pakistanâs debt to negative from stable, citing similar reasons, though it maintained its ratings at B2.
The cost of protection against a default in Pakistanâs sovereign debt trades at 1,800 basis points, according to its five year credit default swap, a level that indicates investors believe the country is already in or will soon be in default.
An investor would thus need to pay $1.8 million annually to insure against $10 million of Pakistanâs sovereign debt.
<b>TOUGH OUTLOOK</b>
Pakistan is in fast need of cash. According to S&Pâs estimates, the countryâs $4.7 billion in net foreign reserves at the central bank marked a 67 percent plunge from a year ago.
Its current account deficit is also running well ahead of target, reaching $2.5 billion in July and August.
That means that in just the first two months of the new fiscal 2009 year, Pakistanâs shortfall reached 1.6 percent of gross domestic product, or more than a quarter of the governmentâs full-year target of 6 percent of GDP.
Though the Asian Development Bank said last week it approved a $500 million loan to help Pakistan, the country will need far more money than that according to analysts.
A senior adviser to the government said last month the country would need $7 billion in total to cover its projected current account deficit of $14 billion for the fiscal year, of which it needed $3 to $4 billion upfront.
According to a Citigroup report last week, Pakistan is losing about $1 billion of its foreign exchange reserves a month, at a time when the prospects of raising money whether through asset sales or international bonds have become very difficult in the midst of a global financial crisis.
âAt this juncture, Pakistan does not appear to have the financial sources to service its near-term amortizations, including the $500 million maturing Eurobond in February,â the analysts said in the report.
Pakistan is also facing political turmoil which includes domestic security concerns and a growing militant threat in border regions with Afghanistan.
The countryâs financial markets have taken a beating as a result of the uncertainty, with the benchmark Karachi Stock Index down 35 percent for the year as of last week.
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