December 20, 2006	Wednesday	Ziqa'ad 28, 1427

KARACHI, Dec 19: Standard and Poor's Ratings Services affirmed its 'B+' foreign currency and 'BB' local currency long-term ratings and its 'B' short-term sovereign ratings on Pakistan.

At the same time, it revised the outlook on the local currency rating to positive from stable, while affirming the existing positive outlook on the foreign currency rating.

According to Agost Benard and Sani Hamid, Singapore, primary and secondary analyst of the rating agency, the outlook revision on the local currency rating to positive from stable reflects the government's renewed effort to finance more of its fiscal gaps through local currency bond issues after a period of suspension.

The resumption of Treasury bond auctions and the extension of the yield curve to 20 years will benefit domestic capital markets, extend the average maturity of the government's rupee-denominated debt, and will go some way toward alleviating the need for central bank deficit financing.The ratings take into account Pakistan's favourable macroeconomic policy environment, improved real GDP growth prospects, and its declining contingent liabilities.

Standard & Poor's believes the cumulative effect of reforms should put the country on a higher growth path, with a medium-term growth potential of around 7 per cent per year.

The reforms have also directly contributed to a sharp decline in the government's contingent liability, particularly through the privatisation of much of the banking sector, and of a number of state-owned firms, notably the Karachi Electric Supply Corporation.

Pakistan's ratings, however, remain constrained by its high levels of public and external indebtedness, notwithstanding the sharp declines witnessed over the past five years. Net external debt to current account receipts has improved to an estimated 55 per cent at year-end 2006, from 21 per cent at year-end 2001.

Although this ratio is set to decline at a much slower pace and the country may run current account deficits approaching 4 per cent of GDP for the near future.

Furthermore, the concessional nature of the public external debt ensures a very low interest burden and hence minimal stress on external liquidity from debt service.

The ratings are also constrained by the country's narrow revenue base, and accommodative fiscal policy. The government revenues are estimated at only 14.7 per cent of GDP for fiscal year 2007, while the country's stubbornly low tax-to-GDP ratio of just 10.4 per cent is not expected to improve materially with the modest initiatives of the 2007 budget aimed at widening the tax base.

Gross general government debt to revenues should, therefore, remain at around 380 per cent, well in excess of the median 200 per cent for similarly rated sovereigns.

The general government fiscal deficit is expected to be around 4 per cent of GDP this fiscal year ending June 30, 2007, which includes an estimated 0.5 per cent of GDP of earthquake-related spending that will be financed with concessional loans.

The positive outlook reflects the expectation that the government will deepen implementation of current economic policies and maintain general government deficits at 4pc of GDP or less. It also reflects the likelihood that Pakistan will continue to enjoy the economic benefits of its close political relationship with the US, including support from official creditors. —APP