Worst may not be over for Pakistan despite IMF move: agencies

By Umesh Desai

HONG KONG (Reuters) - Pakistan's request for help from the International Monetary Fund is a positive step toward putting its economy in order but rating agencies say its crisis is far from resolved.

The rupee and stocks were largely flat early on Thursday after the International Monetary Fund said Pakistan had requested its financial assistance to overcome a balance of payments crisis.

But its 2016 sovereign bond fell as investors fretted over the potential conditions that could be attached to IMF assistance and how the economy might react.

Islamabad is expected to begin talks on a loan program with the IMF in the next few days after the government approached the agency for help, having run out of options to rectify its crisis.

"The worst is not necessarily over yet," said Moody's analyst Aninda Mitra, adding that much would depend on how soon the government was willing to accept and start implementing conditions under which an IMF loan will be granted.

"If we start noticing that reserves are dwindling even faster and the adjustment measures are also taking longer amid continued delays in finalizing a financing deal with the IMF, then we will have to move on the rating front," he said.

The agency's current rating B2 is five notches below investment grade.

Pakistan's foreign currency reserves have been falling at a rate of nearly $1 billion a month, and the central bank has barely enough to cover six weeks of imports.

Total reserves, including those held by commercial banks, stood at $7.75 billion on October 11, of which the central bank's accounted for $4.34 billion.

Pakistan needs $10 billion to $15 billion of support from foreign lenders to cover its current account financing gap and undertake economic adjustments over the next two years, the country's newly appointed economic trouble-shooter, Shaukat Tarin, said on Tuesday.

Inflation in Pakistan is running at close to 25 percent, the budget deficit is unsustainable, government borrowing from the central bank has squeezed liquidity in the banking system and international bond prices have priced in the risk of a debt default.

Rating agencies Moody's and Standard & Poor's have both placed the country's sovereign rating on watch for a possible downgrade.

Earlier this month, S&P reduced Pakistan's rating to CCC-plus from B. The current rating, which is seven notches below investment grade, could be lowered further, it warned.

"Even if they do agree on a program, an IMF program is not guaranteed to be successful, and so it is too early to say if they have done enough," said S&P analyst Agost Benard.

He said the implementation of a program could still be a major problem given Pakistan's unsettled politics and the global fiscal environment. Government's globally have pledged close to $4 trillion to resolve the global credit crisis affecting their own banking systems and economies.