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Pakistan at risk of rating downgrade

Supporters of Pakistani opposition politician Imran Khan wave Pakistan Tehreek Insaf (PTI) party flags during an anti-government protest in Islamabad on September 7, 2014.
ASIF HASSAN | AFP | Getty Images
Supporters of Pakistani opposition politician Imran Khan wave Pakistan Tehreek Insaf (PTI) party flags during an anti-government protest in Islamabad on September 7, 2014.

Violent demonstrations demanding the resignation of Prime Minister Nawaz Sharif are "credit negative" for Pakistan and threaten the country's stable sovereign rating, analysts said.

"[The protests] threaten progress on structural reforms since a weakened government will be less able to implement meaningful policies to address pressing domestic challenges," Moody's analyst Anushka Shah said in a report.

Most importantly, Moody's said the political turmoil could prevent the country from delivering on economic reforms that were part of an International Monetary Fund (IMF) bailout program.

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Last September, the IMF agreed to lend the struggling Southeast Asian nation $6.7 billion over a three-year period on the condition that Karachi would implement structural reforms, such as privatizing loss-making state companies.

"Disbursements from this [IMF] program and linked multilateral funding are crucial to maintaining the country's external liquidity position, a key factor driving its creditworthiness," Moody's Shah continued.

Apart from the IMF bailout, Pakistan has also received funds from the World Bank and the Asian Development Bank, which helped buoy Pakistan's financial account, resulting in Moody's rating revision to stable from negative in July.

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Three weeks of anti-government protests led by opposition party Tehreek-i-Insaf and Islamic cleric Tahir ul Qadri have seen hundreds of civilians injured in clashes with police. The party claims that Sharif May 2013 election victory is fraudulent and insists that he step down.

Still, the country's political strife shows no sign of calming. Over the weekend opposition leader Imran Khan said he would visit the Supreme Court to seek Prime Minister Sharif's disqualification for allegedly lying in parliament.

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Political willingness to push ahead with difficult reforms will be crucial to maintain external support from the IMF and others, Moody's said, and thus bolster the sovereign's credit profile.

The agency currently has a 'Caa1' rating on the county's foreign currency government bond while the local currency bond rating stands at 'B1.' Pakistan's country ceilings remain unchanged at Not Prime.

Standard & Poor's currently has a B-minus long-term sovereign rating on Pakistan and warned that its ratings could be lowered if government reform efforts slow, which could aggravate the country's external liquidity risk. Foreign reserves fell to $8.6 billion at the end of August compared with $9.6 billion in early July.

Between the two agencies, Pakistan's ratings still remain deep in speculative territory.

The odds of a coup

Despite the political volatility, investors have yet to be scared off. Since mass street protests began in early August, the benchmark Karachi stock index has only lost around 2 percent.

Pakistan is no stranger to political strife, having endured numerous military coups since 1958, but the army has been cautious thus far. Military sources told Reuters that army chief Raheel Sharif has no interest in direct intervention.

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Analysts seem to agree, quashing fears of another coup.

"It is probable that the army will not call for Sharif's resignation and an outright coup remains highly unlikely, given that there is little public or military appetite for the army to take over direct responsibility for the country's precarious economy and persistent power shortages," said Omar Hamid, head of Asia Pacific country risk at IHS.

Analysts at Citi Economics echoed that view in a report earlier this month.

"We believe that it is unlikely to take action that would in any way risk undermining its legitimacy in the eyes of the wider population. This is particularly important at a time when the army is in the process of battling extremists within its own borders, most notably the Pakistani Taliban," said the report.