Business News

Pakistan rupee falls further after Moody's rate cut

May 21, 2008, 13:35 GMT

Karachi - The Pakistan rupee tumbled further against the US dollar on Wednesday following news of a fresh rate cut by international rating agency Moody's Investors Service, citing economic imbalances and political uncertainties, analysts said. The rupee in the inter-bank market crossed 70 against the dollar at one time before the central State Bank of Pakistan's indirect intervention to bring it down to 69.40/69.60 for the close against 69.70/69.90 on Tuesday. 'This is an artificial control, the rupee will keep sliding as oil prices have now hit 130 dollars a barrel,' said Ali Kadir, a trader at Invest Cap Securities. Kadir said the central bank verbally ordered major banks to trade below 70, which saved the rupee's fall temporarily. Dealers said Moody's cut in Pakistan's sovereign foreign currency bond rating to B2 from B1 further put pressure in the market. Moody also reduced Pakistan's local currency debt issue rating to B2. With this move, Pakistan's foreign currency rating now stands even lower than Turkmenistan and Jamaica, showing Pakistan's precarious image in the eyes of foreign investors. Similarly, the local currency bond rating has come down on a par with Cambodia and Honduras. 'This will increase interest rates on Pakistan's upcoming bonds,' said Kadir. In an unofficial open market too the rupee remained under pressure but steady at 70/70.10 against the dollar. This is the second rate reduction this month for Pakistan. Earlier on May 15, Standard & Poor's also reduced Pakistan's long- term foreign currency debt rating to B from B+, also citing expanding fiscal and external imbalances against a volatile political background. In the latest move, Moody cited several reasons both economic and political. On the economic front it said: 'Pakistan's fiscal and current account deficits could surpass 7 per cent of gross domestic product and are heightening inflationary pressures. Substantial fiscal loosening and poor tax collection had led to a sharp erosion in the fiscal position.' Political uncertainty also compounded the situation as Pakistan's seven-week-old coalition government is fractured over a dispute about the reinstatement of judges. Nine ministers from the federal cabinet, belonging to coalition partner, the Pakistan Muslim League-Nawaz party of former premier Nawaz Sharif, quit on May 13.

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