ISLAMABAD, Nov 22: The Singapore-based Standard & Poor's Ratings Services on Monday raised Pakistan's long-term sovereign credit ratings by one notch, to 'B+' for foreign currency and 'BB' for local currency.

An announcement by the rating agency said the upgrades reflect declining debt and debt-servicing burdens, as well as sustained economic progress. The rating actions also reflect Pakistan's (foreign currency B+/ Stable/B; local currency BB/ Stable/B) moderate external liquidity position, it said.

The agency, however, warned quick souring of Pakistan-India relations and said the outlook reflects the high political and associated economic risks. "Ties with India, although having improved recently, could sour quickly," it said.

More permanent détente with India could bring about a sizable peace dividend and more economic benefits, lifting Pakistan's growth prospects. The agency said Pakistan's macroeconomic conditions continue to improve because of responsible economic management and gradual structural reforms.

Its economy has outperformed expectations by registering real GDP growth of 6.4 per cent in fiscal year 2004 ended June 30, the fastest in over 10 years. The higher growth rate reflects both cyclical factors, and growing domestic confidence, evident in consumption and investment growth.

It said the outlook for GDP growth remains encouraging, thanks to recovery in the industrial sector and returning investment. "The government has remained steadfast in generally prudent fiscal management, thereby raising investors' confidence," said Standard & Poor's credit analyst Ping Chew, director in the Sovereign and International Public Finance Ratings Group.

"Pakistan's general government deficits are likely to be controlled at moderate levels, despite an expected widening in the deficit (excluding grant) in fiscal 2005 to slightly above three per cent, from 2.4 per cent in fiscal 2004.

This will preserve the government's primary surpluses, which combined with privatization proceeds, will lower the debt burden (as a ratio of GDP) further in the medium term. Its debt-servicing burden has likewise declined," Mr Chew noted.

Careful husbandry of international reserves, at more than $12 billion at the end of September 2004, gave rise to moderate external liquidity. Although strong domestic demand might lead to a current account deficit after four years of surpluses, reserves levels are still likely to cover gross financing needs twice.

The stable outlook reflects that further upward ratings trajectory will have to depend on even more rapid fiscal consolidation and economic improvements, and speedier implementation of reform programmes, given the structural weaknesses in the country.

If the existing economic achievements are built or going forward and deepened economic reforms successfully attained, the ratings could be upgraded, particularly if the political framework remains stable and relations with India improve.