Morning Call about Credit Rating – Arif Habib Limited

Karachi, July 16, 2012 (PPI-OT): Pakistan’s credit rating slides further into junk category

Credit rating one level down from Baa3 to Caa1

Moody’s International has revised credit ratings of Pakistan’s foreign and local currency bond from Baa3 to Caa1 i.e. very high credit risk category.

According to Arif Habib Limited, Pakistan was last put under this category in 1998 and 2001, both due to concerns over the bleak external accounts scenario. However, in both the cases, this negative outlook didn’t persist for long and Pakistan was placed under a category higher to the junk.

What prompted Moody’s to downgrade Pakistan’s credit rating?

As per the document released by Moody’s on 13th July 2012, the key drivers for downgrading credit rating are:

USD billion

Reasons for downgradingFY11FY12
Deterioration in Pakistan’s balance of payments over the past year

2.5

-2.9

The looming large repayments to the IMF

1.2

7.5

The dwindling level of official foreign-exchange reserves

18

15

The institutional weakness stemming from political instability and constrained government finances Jul-May upto 2015

-

-

Future outlook: Moody’s to consider a further downgrade

Taking into consideration the socio-economic factors prevalent in Pakistan, Moody sees no upward revision in credit rating over the medium term. In fact, a negative outlook is being projected for Pakistan’s economy in near future which might lead to a further slash in the rating.

What do other raters see?

Contrary to Moody’s, another credit rating agency namely Standard and Poor’s (S and P) rate Pakistan in B- category which means the economy has a stable outlook. This rating was last updated in Oct-11. Till date no revision has been made by S and P.

All is not gloom and doom

Despite all the negativity surrounding Pakistan’s economy, there are still rays of hope that might turnaround the current detrimental situation of the economy. Arif Habib Limited’s balance of payment is likely to improve with expected decrease in imports bills due to reduction in international oil prices (- ~11% YoY). Also, increasing remittances from abroad (+~20% YoY), materialization of funds under Coalition Support Funds(CSF) of USD 1.2 billion and 3G Auction(~ USD 80 million), and transfer of USD 500 million by China into Arif Habib Limited’s reserves will add some stability to external account.

Market may witness foreign selling pressure

Arif Habib Limited may witness selling pressure from the foreign investors as the Pakistan’s country risk premium has increased with this downgrade by Moody’s. Consequently local investors may remain cautious from making fresh investments as the market has already augmented by 27% in CY12-to date. Stock market outlook remains positive on a medium to long term as KSE still offers attractive multiple compared to the region.