PAKISTAN'S credit rating was cut for the first time in nine years by Moody's Investors Service, which cited 'growing economic imbalances and renewed political difficulties', reports Bloomberg. The South Asian nation's foreign-currency sovereign rating was lowered to B2 from B1, one level below Turkmenistan and Jamaica. The ranking on locally-issued debt was also reduced to B2, Moody's said in an e-mailed statement on Wednesday. Pakistan's seven-week-old government is fractured after coalition partner Nawaz Sharif and nine ministers quit in a dispute over the reinstatement of judges sacked by President Pervez Musharraf. Standard & Poor's cut Pakistan's rating on May 15, and the downgrade by Moody's puts the country's local-government bonds on par with Honduras and Cambodia. "The ratings could impact Pakistan's effort to raise debt overseas or sell shares in companies," said Zaheeruddin Khalid, head of research at Al-Meezan Investment Management Ltd in Karachi, which oversees $270 million in stocks and bonds. The cut was 'expected after ratings were lowered by S&P on sliding economic indicators'. Credit-default swaps on Pakistan's government debt increased 10 basis points to 530 at 3:30 pm in Hong Kong, according to Morgan Stanley's prices. That means it costs $530,000 a year to protect $10 million of Pakistan's debt from default for five years. Pakistan's foreign currency rating was cut one level to B by S&P, citing government spending that's growing faster than revenue collection and political instability. The outlook is negative, S&P said. "The outlook on the government's bond ratings and bank deposit ceilings was changed to stable from negative," Moody's said. "The stable outlook reflects the prospect of external financial support from multilateral development banks and bilateral creditors that should bolster external liquidity and offer some policy manoeuvring room." Overseas investment in Pakistan, which reached a record $5.1 billion in the year to June 2007, has since fallen 17 per cent, according to central bank data. Foreign direct investment declined to $3.48 billion in the 10 months ended April 30 from $4.18 billion a year ago. The rating cut may further deter overseas investors who have already retreated from the South Asian nation, buying a net $119 million of Pakistani stocks in the 10 months ended April 30, compared with purchases of $1.76 billion a year ago. "Pakistan's fiscal and current account deficits could surpass 7 per cent of gross domestic product and are heightening inflationary pressures," Moody's said. "Substantial fiscal loosening and poor tax collection had led to a sharp erosion in the fiscal position." The fiscal deficit in the first eight months of this year widened to 4.7 per cent of the nation's $146 billion GDP, exceeding the full-year target of 4.5 per cent. The PPP-led government is constrained by the highest inflation in 25 years and economic growth that is expected to slow to 6 per cent this fiscal year ending June 30 from 7 per cent last year.