S&P: Pakistan politics may affect ratings

Standard & Poor's said in a report that there is no telling what the outcome on the Pakistan turmoil will be but one thing is certain: The country is at a turning point and how the country's political transition unfolds over the next few months will give a strong indication on whether Pakistan's ratings will remain supported by reforms, foreign investment and a prudent policy mix, or whether they will be eroded by continued instability or a regression into a highly politicized and ineffectual administrative environment under an elected government.

"Fiscal slippages may arise, jeopardizing the currently favorable debt trajectory," said S&P credit analyst Agost Benard.

"Foreign currency inflows could also be affected, thus hurting Pakistan's external liquidity position. The other notable risk is that economic growth could also suffer."

The agency said it recently revised the outlook on the sovereign rating on Pakistan to negative after President Pervez Musharraf declared a state of emergency on Nov. 3.

"Greater clarity is only likely after the National Assembly elections, scheduled for Jan. 8, 2008, but it's clear that past achievements could be put at risk and credit supporting factors diminish, should political uncertainty persist or, if the new paradigm yields revolving-door governments, where political imperatives detract from reforms and fiscal consolidation," Benard said.

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