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Emergency erodes rating outlook

ABU DHABI — Moody's Investors Service has changed the outlook to negative, from stable, on the B1 government foreign-and local-currency bond ratings following President Musharraf's imposition of emergency rule in Pakistan.

A negative outlook was also placed on Pakistan's B2 foreign-currency country ceilings for bank deposits. The outlook for Pakistan's Ba3 foreign-currency country ceiling for bonds is unaffected by last week's action and remains stable.

Moody's believed that the imposition of emergency rule represents a further erosion in Pakistan's governing capacity and underscores Pakistan's heightened political instability. President Musharraf's narrowing domestic support base and shakier relations with the U.S. and other key international allies now appear to be a greater threat to investor confidence than was true in the past.

"The imposition of emergency rule considerably complicates the domestic political scene," said Moody's Vice-President and senior analyst Aninda Mitra. "From a credit perspective, the emergency rule, and more important, the factors behind such an action could undermine Pakistan's ability to sustain significant inflows of confidence-sensitive capital, which have financed a considerable portion of the country's large current account deficit," said Mitra.

Political turbulence in Pakistan since the beginning of this year had been shrugged off by foreign investors and domestic market participants, who remained confident that the country could muddle through. "However the balance of risks now appears to be shifting to the downside," said the analyst.