KARACHI, May 18: Standard & Poor's Ratings Services on Friday assigned its 'B+' senior unsecured foreign currency debt rating to Pakistan's proposed global bond issue of up to $1 billion.
The encouraging rating has been assigned with few reservations about some sectors of the economy.
“The sovereign credit ratings on Pakistan reflect strong economic growth that is supported by a consistent and reform-oriented policy environment, balanced against prevailing high public debt and low fiscal flexibility,” said the rating agency.The proposed issue will consist of a new 10-year bond maturing in 2017, and the reopening of the existing bond maturing in 2036.
The 'B+' rating on the existing bond was also affirmed.
The rating agency found the economic growth of Pakistan sustainable hoping better performance in the future.
"Pakistan's generally prudent economic management and strong policy environment, which over the past several years has consistently focused on structural and institutional reforms, is translating into better growth prospects.”
The rating agency viewed economic growth healthy improving at the rate of seven per cent per year with the help of foreign investment.
Trade liberalisation and extensive privatisation are generating productivity improvements, and attracting a rising amount of foreign direct investment, much of it green field. As a result, the country is poised for a period of sustained high growth of about seven per cent per year, helping to alleviate poverty and make further inroads in debt reduction, said Standard & Poor’s.
The agency expressed disappointment over narrow tax base which has been stagnant for many years though the revenues have improved with the size of economy.
It said the ratings remain constrained by a high level of public and external leverage, and fiscal inflexibility owing to an exceedingly narrow tax base.
"This fiscal constraint limits much-needed public infrastructure investment, and hampers the effectiveness of monetary management, given that the practice of deficit financing by the central bank still prevails.”
Government revenues are estimated at 14.7 per cent of the 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 revenue-raising initiatives of the 2007 budget, said the rating agency.
Gross general government debt to revenues should, therefore, remain at about 380 per cent, well above the median 200 per cent for similarly rated countries.
The government has been under severe criticism by economists regarding accumulation of domestic and foreign debts which curtail availability of liquidity to invest in development projects.
However, the agency did not see any impact of political instability due to coming elections, campaign against President Musharraf and some major violence in the cities, like Karachi and Peshawar.
“The recent escalation of political tension and uncertainty posed by impending presidential and parliamentary elections are unlikely to have any significant impact on credit fundamentals,” said the rating agency.
"Yet, the longer-term challenge for the government remains, which is to expand and deepen reforms of its tax system to raise government revenues significantly from the current level, and to demonstrate that the current pro-market, pro-growth set of policies will be sustained during successive administrations," it added.
Analysts said that the assigning B+ to the bonds which the government plans to sell in the European Bonds market would encourage her to use the full potential to tap maximum from the market.
The government has adopted policies to borrow more from the markets instead of borrowing from the donor agencies or consortiums of several countries.
