The death of former prime minister Bhutto, one of the main political contenders in the upcoming general elections, is a significant blow to Pakistan's transition to democratic rule, and leaves a considerable political vacuum in Pakistani politics. It therefore, casts doubts on whether general elections scheduled for January 8, 2008, will proceed, while violent reactions by supporters could potentially spark escalating civil disorder.
The prevailing negative outlook on the ratings on Pakistan encapsulates to a large extent risks to the political process, including attempts on the life of political leaders after a number of such incidents in the past. Hence, the assassination in itself will not result in a rating action. However, a further weakening of Pakistan's institutions, in conjunction with rising levels of violence and disorder, and the postponement of the January elections would lead to a rating downgrade.
S&P added that a prolonged political stalemate or social disorder would make the rating vulnerable, primarily from an external liquidity and fiscal angle. Foreign direct investment and portfolio flows would likely decline, negatively affecting Pakistan's external liquidity position, given its large current account deficit of about 4.8 per cent of GDP. In parallel, the sovereign may encounter increasing difficulty in refinancing its external and domestic debt, as lenders' risk aversion toward Pakistan increases.
In addition, fiscal slippages may arise, pushing deficits beyond the government's target 4% of GDP, and jeopardizing the currently favorable debt trajectory. In the short term, however, a potential escalation of violence and wide scale social upheaval could impair the sovereign's administrative capacity and interfere with its day-to-day operations.
