KARACHI - Standard & Poor's Ratings Services has lowered its long-term foreign currency debt rating on Pakistan to 'B' from 'B+' and its long-term local currency rating to 'BB-' from 'BB'. At the same time, we affirmed our 'B' short-term rating on the sovereign. The outlook is negative. In tandem with the lowering of the sovereign credit rating, we are also lowering the Transfer and Convertibility Assessment rating on Pakistan to 'BB-' from 'BB'. Commenting on the S&P rating actions, capital market sources said the credit rating result was not unexpected as Security & Exchange Commission of Pakistan had already expressed its doubt regarding the downgraded rating by the S&P could be assigned, following the macro economic imbalances and political instability. It seems unlikely to revise further upward improvement in credit rating status of Pakistan by S&P IN future, said sources.         The downgrade reflects rising pressures on the sovereign's credit fundamentals from the combination of expanding fiscal and external imbalances, against a volatile and uncertain political setting. "Following a year of turbulence accompanying Pakistan's transition to democratic rule, macroeconomic management and policy formulation remain significantly constrained by the precedence of political imperatives in the context of coalition and historical rivalry between the two main partners, the Pakistan Peoples' Party and the Pakistan Muslim League, Nawaz Sharif Faction," said Standard & Poor's credit report. The negative outlook reflects its assessment that the sovereign's vulnerabilities may accentuate further, given that the emergence of a stable, cohesive, and effective political environment needed to tackle mounting macroeconomic imbalances doesn't seem to be at hand. In a sharp reversal of years of consolidation, the general government fiscal deficit (excluding grants) is set to reach about 8% of GDP in fiscal 2008 (ending June 2008), well above the 4% official target and the 3.7% average for the past five years. With the disintegration of the recently installed cabinet, fiscal adjustments planned by the administration to stem the marked deterioration will remain wanting. Significant expenditure overruns due to rising subsidy and interest costs, and defense and capital spending are exacerbated by the apparent atrophy of an already weak revenue effort. For the first half of fiscal 2008, total revenues rose by 1.8% year-on-year; if this trend persists throughout the year, Pakistan's revenue-to-GDP ratio would decline to about 14% from 15.3% in 2007. Fiscal shortfalls of this magnitude, in conjunction with adverse changes in the financing mix toward short-term higher-cost domestic borrowing and commercial external borrowing, jeopardize With a still substantial public leverage at an estimated 59% of GDP, Pakistan's debt-to-revenue ratio could rise to about 400% against the median 171% for similarly rated countries. Similarly, Pakistan's once favorable and improving external liquidity is suffering a serious reversal, highlighted by the recent sharp fall in foreign reserves. A rapid rise in the oil import bill and stagnant exports are yielding record current account deficits, projected to reach 7.3% of GDP for fiscal 2008. Unlike in previous years, these deficits are no longer covered by foreign direct investment and portfolio inflows, both of which have declined due to the domestic political uncertainty and adverse global liquidity conditions. Thus, from  a peak of US$14.2 billion in October 2007, central bank foreign exchange reserves have fallen by 30% to US$9.9 billion at the beginning of May, sharply eroding Pakistan's liquidity cushion and prompting some restrictions on foreign exchange transactions and offshore accounts. "With the underlying negative political setting partly causing, as well as prolonging, the fiscal and external deterioration, an improvement in the rating or outlook is not envisaged unless a fundamental shift occurs, with concerted and sustainable policy measures focusing in particular on fiscal revenues and expenditures, and on debt management to reduce central bank financing of fiscal deficits," said Mr. Benard. The lowering of the Transfer and Convertibility Assessment rating assumes that current exchange controls will not impair the debt service payment mechanism and ability for the country's corporate sector.