KARACHI, Oct 30: Moody’s Investors Services — the international rating agency — raised Pakistan’s country ceiling for foreign currency bank deposits, one notch from ‘Ca’ to ‘Caa1’.

A statement issued from New York on Tuesday, jointly signed by the MD David H. Levey and VP-Senior Credit Officer at Sovereign Risk Unit of Moody’s also said that the rating agency had confirmed its Caa1 country ceiling on foreign currency debt as well as the Caa1 rating on rupee-denominated government debt, and also raised the outlook on Pakistan’s country ceilings and on government debt to stable from negative.

As a consequence of the bank deposit ceiling upgrade, the bank deposit ratings of the four banks currently rated by Moody’s (Habib Bank, United Bank, National Bank and Muslim Commercial Bank) were raised to Caa1 and their deposit rating outlooks revised to stable.

Moody’s said that these changes took into account the likelihood that Pakistan would receive sizeable debt relief, including partial forgiveness of bilateral loans, in connection with its cooperation with the US military campaign in Afghanistan.

Commenting on the upgrade by Moody’s, analysts at brokerage Invest Cap said: “At the risk of introducing gloom to the glory, this enhanced rating still falls in the agency’s low category of highly speculative.” But analysts conceded that reaffirming its debt rating in the face of tremendous growth especially in foreign debt that SBP Annual report had pictured only the other day, showed that the rating agency had confidence in the country’s ability to service and pay off debts.

Invest Cap observed that Standard and Poors — the Moody’s competitor — does not expect to revise its ratings till the end of the year. Analysts pointed out that even after the Moody’s upgrade, in absolute terms, S&P’s rating (single B-minus) was still one notch better than Moody’s. S&P was said to have indicated that it felt uncomfortable about the “war next door” and since the exact quantum of debt relief and disbursements were still unclear, it would rather wait for the situation to develop. But even Moody’s upgrade on Tuesday did not come without a caveat. In its statement on Tuesday, Moody’s had gone on to say that it was concerned that such cooperation (in military campaign) had significantly heightened domestic political tensions, the ultimate consequences of which could be both politically and economically destabilizing. Moody’s went on to observe that the breathing room provided by potential debt relief could only be sustained in conjunction with ongoing economic reform efforts such as have been undertaken during the past year. The agency emphasized that the ratings levels remained very low, indicating the still-fragile external position and public sector finances, in addition to weak investment and growth prospects.

The legacy of past profligacy and mismanagement had proven hard to overcome, and the required acceleration of structural and macroeconomic reforms demanded a greater institutional capacity than had previously been evidenced. “Against this difficult background, particularly given the divisive political situation, Moody’s believes that Pakistan’s credit risk continues to be relatively high,” the international rating agency concluded.