* Moody’s report says weak governance and political tensions set to heighten risks of sudden shifts in private investor confidence
ISLAMABAD: Moody’s Investors Service said in a report on Pakistan on Friday that weak governance, political tensions and flaws in the legal system would undermine institutions and policymakers, and heighten risks of sudden shifts in private investor confidence.
The credit rating agency, however, went on to justify maintaining a stable outlook on Pakistan’s rating as the structure of government debt largely consists of long-term credits from official bilateral and multilateral lenders, “which adds stability and reduces rollover risks”.
Last month, Moody’s and Standard & Poors (S&P) both cut Pakistan’s credit ratings to five levels below investment-grade. S&P, however, opted for a negative outlook.
Moody’s said, “Renewed political discord is unlikely to provide the stable and orthodox policy framework necessary for quickly limiting these macroeconomic imbalances.”
The statement came two days after the government announced budget proposals for 2008-09, setting a target to cut the fiscal deficit to 4.7 percent of gross domestic product and the current account deficit to 6 percent.
There is concern over the size of the fiscal and current account deficits — under pressure from soaring import costs … and worry that the political uncertainty hanging over Pakistan’s coalition government could undermine policy making and implementation..
The government said the fiscal deficit is expected to be 7 for the fiscal year of 2007-08, and the central bank has forecast the current account deficit at between 7.3 and 7.8 percent for the year ending on June 30.
The government announced in the budget they would gradually withdraw food and oil subsidies from the current Rs 405 billion to Rs 293 billion.
Slashing subsidies would further increase inflation and data released earlier this week showed consumer prices rose 19.27 percent year-on-year in May, the highest in over three decades.
The government has set a 12 percent target for inflation in 2008-09. Analysts say it will be almost impossible to achieve if subsidies on oil and food are withdrawn.
A day earlier, ratings agency S&P said the budget would have no impact on ratings and was in line with expectations, adding the rating would be lowered if fiscal and current account deficits did not improve.
Analysts were unsurprised by the rating agencies stance.
“This was more or less expected,” said Asif Qureshi, head of research at Invisor Securities Ltd.
The country’s stock market and the rupee remained largely unaffected by the statements released by the ratings agencies. Dealers said this came as no surprise and foreign interest has been lacking since last month due to mounting political and economic uncertainty.
The Karachi Stock Exchange (KSE) is down 8.1 percent since the start of the year, while the rupee has depreciated 8 percent. reuters