US rating downgrade may strengthen Pak Rupee – Alfalah Securities Limited

Karachi: The Standard & Poor (S&P) rating agency has downgraded United States’ credit rating from “AAA” to “AA+” with a negative outlook which suggests that the US economy would be reviewed under strict supervision for the upcoming years.

According to Alfalah Securities Limited, ratings are expected to get further downgraded if the US fails to cut their spending or if the United States’ debt or interest rates rise to an intolerable or risky level. The US downgrading might act positively for Pakistan as the US Dollar would come under pressure against other currencies which would strengthen the Pak Rupee in its real effective exchange rate (REER).

Moreover, the US downgrading would also induce capital flight as a consequence of loss of confidence of Overseas Pakistanis in the US economy and would result in higher remittances thus increasing Alfalah Securities Limited foreign reserves, resulting in appreciation of Pak Rupee against the US dollar. The US dollar depreciation would enable Pakistan to reduce its import bill which would improve its balance of payment situation as being a net importer.

However, the economic crisis in US is expected to lead to a fresh row of recession or at least an economic slowdown which would negatively impact the world mainly the large developed economies. The repercussions would be higher Gold and Silver being a safe haven for weakness in dollar while the prices of other commodities like crude oil and edibles may ease off. It would in turn lower the burden on Pakistan’s import bill.

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