NEW YORK – Moody’s Investor Service Friday downgraded Pakistan’s sovereign credit rating by a notch, citing strains on the economy’s external payment position, which has been hurt by a widening trade deficit and a decline in capital inflows, The Wall Street Journal reported.
“A combination of factors would prompt Moody’s to consider a further downgrade. These include a substantial worsening of the domestic political environment and significant further deterioration in the policy framework and investor confidence,” the newspaper said quoting Moody’s press release. Moody’s downgraded Pakistan’s foreign and local currency bond rating to Caa1 from B3, it said, adding the outlook for the rating is negative. A sovereign with a Caa rating is judged to be of poor standing and subject to very high credit risk.
Pakistan’s current account in May showed a deficit of $3.8 billion. Remittances from abroad that provided support to the current account until recently are tapering off, Moody’s said.
“Moreover, weak government finances, structural inflationary pressures and domestic political uncertainties are adding to Pakistan’s external vulnerabilities and debt sustainability, thereby compounding the downward pressure on sovereign creditworthiness,” it said.
Moody’s said the downgrade was also prompted by an upcoming repayment of $7.5 billion to the International Monetary Fund. The principle and interest are due in 2012, 2013, 2014 and 2015. The country’s dwindling level of official foreign-exchange reserves has also raised the probability of a default over the next year or two, Moody’s added.