Rapid depletion of Pakistan?s foreign exchange reserves has emerged as the most imminent risk facing its sovereign rating and country ceiling, according to Moody?s Investors Service. Additionally, many of the credit stresses which led a downgrade in its sovereign rating from to B2 from B1 in May 2008 are still present.
?Delays in the ability of fiscal authorities to wean themselves away from central bank financing of its budget deficit also represent a formidable obstacle for improving inflationary expectations and reducing pressure on the Pakistani Rupee,? said Aninda Mitra, a VP and senior analyst with Moody?s Sovereign Risk Unit.
?Accordingly, if, in coming months, Moody?s concludes that a deterioration in Pakistan?s credit fundamentals is becoming irreversible, then negative rating actions may follow,? said Mitra. His remarks coincided with the release of a Moody?s special comment?which he authored?on Pakistan, entitled, ?Pakistan?s government faces pressing challenges?. The report highlights the political environment as crucial to the country overcoming challenges.
?The critical ingredient for ensuring the success of ongoing policy adjustments and structural reforms as well as negotiations for external assistance and assuaging foreign investor sentiment is an improvement in domestic political stability,? said Mitra.
He added that if the government remains unable to govern effectively, then discordant policies and their weak implementation could further set back investor confidence.
?In turn, this may damage Pakistan?s balance of payments stability as well as the government?s fiscal financing prospects and raise the likelihood of sovereign payment arrears or enforcement of deposit controls,? the author added.
The report also says that Musharraf?s resignation may help in limiting domestic political polarisation and policy uncertainty.