Thursday, January 6, 2011

Sluggish economy may trigger banking crisis

SINGAPORE: The flare-up in political turmoil in Pakistan following assassination of Punjab Governor Salman Taseer Tuesday won’t have an immediate impact on the nation’s credit ratings, Moody’s Investors Service said Wednesday, but it warned that prolonged political instability and economic stagnation could lead to a banking crisis in that country.
The prolonged stagnation of Pakistan’s economic growth and high political risk will be large risks for Pakistan over next 12 to 18 months,” said Aninda Mitra, Vice President & Senior Analyst at Moody’s Sovereign Risk Group. If economic stagnation and political instability continue, “it could either cause a sovereign debt restructuring or a banking crisis to occur in Pakistan,” Mitra told Dow Jones Newswires in a telephone interview.
“The staying power (of the government) for implementing tough economic reforms is currently under pressure,” Mitra said. The assassination was “symptomatic of high political risk in Pakistan” but wouldn’t impact the country’s sovereign credit ratings just yet. “These kind of events are already factored into our B3 rating. The event (assassination) itself comes as a shock to the political system but by itself, it doesn’t raise the risk (of a downgrade),” he said.

Pakistan, plagued with budget deficit approaching 6% of gross domestic product compared with 4.7% budgeted this year has been dependent on foreign financial aid to keep its economy afloat. International Monetary Fund provided $7.4 billion in assistance under $11.3 billion emergency loan package set in 2008.
Attached to IMF programme are conditions requiring Pakistan to carry out reforms that include changes to its tax structure and step up economic growth. But Pakistan’s failure to tackle its budget deficit by taking steps to boost revenue and slash spending has frustrated IMF and other foreign donors. United States called on Pakistan to push harder on reforms. ppi

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