ISLAMABAD  - The Moody’s kept Pakistan’s credit rating at negative “Caa1” due to prevailing political instability which is distracting the formulation of economic policy and deters investors in the country.

According to the Moody’s report, the order of Supreme Court of Pakistan to arrest the Prime Minister Raja Pervez Ashraf and 15 others on charges of corruption comes in an environment of simmering political tensions, with parliamentary elections due between March and May. This event is credit negative for Pakistan (Caa1) because it distracts from the formulation of economic policy and deters investors.

“This is another instance where the three-way battle between the executive, judiciary and military arms of government undermines Pakistan’s ability to formulate policies to address the country’s pressing domestic economic challenges, bolster investor confidence and attract external financial support from official creditors and donors. Under such conditions, the possibility of gaining a timely renewal in financial support from the International Monetary Fund (IMF) appears dim”, Moody’s said.

The 15 January judicial order, coupled with recent anti-corruption protests by Doctor Tahirul Qadri and tensions on the India-Pakistan border, all pose immediate threats to Pakistan’s political stability. An arrest of Mr. Ashraf could well delay the smooth appointment of a neutral caretaker government to oversee the upcoming election.

“The factious political situation adds further strain to the external situation as well.  Investors’ growing concerns have been evident in losses in both the currency and capital markets. Five-year credit default swap spreads have widened to 828 basis points, following a spike to 935 earlier this month, from 783 at the start of this year” said Moody’s. The Moody’s said that the outlook for external financing is another trouble spot.

 With debt repayment obligations to the tune of $3 billion coming due at the end of June, and foreign reserves having already fallen to $8.8 billion in January from $12.5 billion last year, Pakistan’s external situation is already strained.

Pakistan would benefit from a renewed agreement with the IMF, particularly given that a Stand-By Loan Arrangement agreed upon in November 2008 went off track before it was fully disbursed and ultimately expired in September 2011. Following a recent IMF visit, there may have been a possibility of Pakistan inking a new agreement upon completion of the electoral process. Now, any delays on this front would only add to external pressures, it said.