October 23, 2008 / 6:41 AM / 11 years ago

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

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.

IMF Managing Director Dominique Strauss-Kahn said financing could be made within the framework of the Fund’s emergency financing mechanism, while a senior Pakistani government official said it would be a stand-by agreement which would run for two years, though the amount had yet to be settled.

Pakistan’s sovereign bonds due in 2016 fell to 30/45 cents to a dollar on Thursday from a previous bid of 39 cents, reflecting some skepticism about how successful IMF assistance might be.

“Even if the IMF decides to lend them money they would impose some strict restrictions that may end up hurting its economy even more,” said a Hong Kong based trader.

“A lot of the bonds and credit default swaps are pricing in that they will have to default or restructure, which would be bad for bondholders,” he said.

The rupee was quoted at 81.40/60 per dollar as markets opened in Pakistan on Thursday, modestly weaker than 81.30/50 at Wednesday’s close.

The main Karachi stock market index was flat at 9,183.74 points. The index has fallen almost 35 percent this year.

A floor set up on the index at 9,144 to support the market is to be removed on October 27. The stock market regulator said late on Wednesday it had approved a 20 billion rupee ($247 million) government fund to support share prices once the floor is removed.

Additional reporting by Aftab Borka in Islamabad and Rafael Nam in Hong Kong

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