Pakistan has second worst credit rating in the world
Posted by jagoindia on December 30, 2008
The billion reasons why US can squeeze Pakistan – if it wishes
Dec 28, 2008
New Delhi: There could be many ways to Pakistan’s hardened heart, when it comes to cracking down on terror, but the one that runs through its economy is perhaps the most clear-cut.
For, the US and the global community can find plenty of bargaining chips vis-a-vis a country that had around $3.45 billion hard currency reserves in November, that will need $10 billion over the next two years to avoid sovereign default, that has the second worst credit rating in the world (in Standard and Poor’s list) and that didn’t need the global financial crisis to go into an economic shock.
The IMF has for now given around $3 billion of the promised $7.6-billion loan to a country that has gone from emerging economy to submerging economy status in a matter of months. And Pakistan is still some distance away from guaranteeing basic economic safety.
So tough economic diplomacy by potential donor countries, if used well, can work with Pakistan. More so because private global finance has had a very rough time dealing with it — between January 1 and December 22, $426 billion flowed out and this outflow began much before the global financial crisis hit. Private foreign investors are unlikely to chip in any time soon. For one, they won’t forget Karachi in a hurry.
Investors in Karachi Stock Exchange saw the KSE-100 index freefall from an all-time high of 15,700-plus in April. By July, the index had fallen by a third and investors attacked the stock exchange building. By late August, the KSE lost nearly $37 billion in market value and the management set a floor for stock prices — a rare and desperate move.
This savagely reduced trading volumes and foreign investors felt trapped. IMF reportedly nixed a plan to give public money to boost the stock market and the price floor was threatening to make Pak capital markets a global pariah. So, on December 15, the floor was removed — and the market is falling again. Trading volumes are still low. Another crisis looms at KSE.
FDI as a source of funds is not an option either, having gone down from over $8 billion to around $3.5 billion. And Pakistan’s credibility as a borrower in global private finance market has never been worse.
Standard and Poor’s and Moody’s credit rating for Pakistan is CCC, one grade above default. In S&P’s list Pakistan has the second worst credit rating of all countries. Seychelles has the worst; but Seychelles isn’t hosting terrorists. An almost-default grade rating means Pakistan’s ability to raise private funds overseas is hugely limited.
Eurobonds worth $500 million raised by Pakistan mature in February 2009. But the market has already rated that issue junk; that’s one verdict on Pakistan’s repayment capacity. The country’s overall external debt profile includes $3 billion in private commercial debt and a little less than $40-billion worth IMF concessionary loans.
External liabilities compound a terrible domestic economic situation. Inflation rates, at a 30-year high in November, of 25% are becoming commonplace. In August, food prices jumped by more than 30% and flour mills, like the KSE, had to be guarded by security forces.
Maybe high fiscal deficits — nearly 10% of GDP — are no longer considered sins in a fiscally stimulated world but Pakistan can afford it less than most, and it has to reckon with IMF conditions. That will also impinge on the Pakistani rupee, which has crashed.
Big job cuts are happening — the national carrier, PIA, shed 5,000 jobs — and Pakistan-watching economists say that 3 to 4 million jobs may be lost in the next two years and that there has already been a sharp rise in the number of people below the poverty line. Of course, the tiny class of wealthy Pakistanis has moved its money out. Dubai is the usual favoured destination.
The truly frightening thing is the speed of Pakistan’s near-collapse. When 2007 ended, Pakistan had three years of 7% growth, healthy FDI but concentrated mostly from Gulf and China, moderately high inflation, double digit foreign currency reserves — $16 billion — and a booming KSE.
In a matter of months, Inflation zoomed, 75% of the reserves were gone, the currency fell by 33% and the stock market by 55%. From 7% growth rates, the Pakistani economy, economists say, may be looking at 3% growth in 2008-09.
This, then, is an economy that needs sustained external help for at least two or three years. Donors just have to make that help conditional on Pakistan acting against its one economic shock-proof industry — terrorism.