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Borrowing up, ratings down!

The government’s nearly wreckless borrowing spree goes up — impacting ratings that have gone down!

The ratings were downgraded by Moody’s. But Standard & Poor’s generally affirmed their existing ones.

Moody’s Investor Services has downgraded Pakistan’s foreign and local currency bond ratings by one notch to Caa1 from B3. The short-term ratings, at the same time, remain unchanged at not-prime with negative outlook. The ratings downgrade is attributed to “the deterioration in Pakistan’s balance of payments over the past year, looming large repayments to the International Monetary Fund, dwindling level of official foreign exchange reserves and institutional weakness stemming from the political instability and constrained government finances.” Repayments to the IMF total $7.5 billion.

The key driver of Moody’s one-notch downgrade of government bond due “the increasing strain on the country’s external payments position as a result of a rising trade deficit and decline in capital inflows,” it said last week.

At the same time, S&P has affirmed its B- long-term sovereign credit rating of Pakistan. The outlook on the long-term sovereign rating remains stable, S&P said. It also affirmed its B- issue rating in Pakistan’s senior unsecured foreign and local currency debt and its B- transfer and convertibility assessment.

“At the same time we raised the short-term sovereign credit rating to B from C, following a change in criteria that links long term ratings with short term ones,” S&P said. The sovereign ratings take into account the country’s weak fiscal profile and the associated high public and external leverage, low income level, as well as the underlying weak political and policy setting. “These constraints are balanced against strong home remittances inflows that help sustain a still–adequate external liquidity situation.”

“Pakistan’s high public and external indebtedness is the main rating constraint. The net general government debt stood at an estimated 52 per cent of GDP in financial year 2011-12 — about 40 per cent of which is external debt,” S&P says. The interest burden on this debt poses a great constraint on discretionary spending, given the already sparse fiscal resources. But S&P has also held out a warning. It says: “We may lower the ratings if major slippages in policy occur, resulting in rising public debt, or if the balance of payments position deteriorates and external liquidity comes under greater pressure. Conversely, we may raise the ratings if Pakistan shows a progress in the fiscal consolidation efforts, manifested in moderating deficits and a steady reduction in the public debt burden.”

Borrowing by the government — to fill the budget deficit — rose to 103 per cent or a total of Rs1.198 trillion on June 30, which marks the end of financial year 2011-12.It sharply contrasts with the government borrowing of Rs590 billion in financial year 2010-11 — a rise of Rs608 billion in financial year 2011-12, the State Bank of Pakistan reported over the weekend.

The fiscal year 2011-12 borrowing included Rs464 billion from the SBP, as against Rs98 billion in financial year 2010-11. The remaining borrowing was from the commercial banks — costing around 13 per cent. It rosefrom Rs617 billion in financial year 2010-11 to Rs696.5 billion in financial year 2011-12.

Economists are highly critical of huge government borrowing and widening deficit finance and its impact on ratings. Prominent economist A.B. Shahid says: “The fact the government has progressively been borrowing higher amounts without a rise in GDP shows how it wastes people’s savings.”

The rising bank borrowing by the government is fuelling inflation which stands at 12 per cent plus. At the same time, it has squeezed commercial bank liquidity, restricting lending to the private industry and business. The commercial banks also prefer to lend to the government because they consider it safe, risk-free and profitable at 13 per cent. The private sector, itself, is facing low volume, and high cost of doing business, often leading to bank credit repayment default.

Views expressed by the author are his own and do not reflect the newspaper’s policy.