Pakistan B2 rating faces forex reserves risk

Pakistan is in danger of a further downgrade of its “B2” sovereign credit rating as its foreign exchange reserves are being rapidly depleted, Moody’s Investors Service.

The ratings agency said the success of structural reforms would be vital to allay foreign investors’ concern, noting that the resignation of General (r) Pervez Musharraf from the presidency would help heal domestic political divisions. “If the government remains unable to govern effectively, then discordant policies and their weak implementation could further set back investor confidence,” Moody’s said in a statement. This would, in turn, damage Pakistan’s balance of payments stability as well as the government’s fiscal financing prospects, it added. “Delays in the ability of its fiscal authorities to wean themselves away from central bank financing of the budget deficit also represent a formidable obstacle for improving inflationary expectations and reducing pressure on the Pakistani rupee.” Moody’s cut Pakistan’s rating to “B2” from “B1” in May. “If, in coming months, Moody’s concludes that a deterioration in Pakistan’s credit fundamentals is becoming irreversible, then negative rating actions may follow,” Moody’s said. reuters