PAKISTAN: upgrade from D (positive watchlisted) to C due to continued improvement in its financial situation and firm economic conditions. The economic and financial situation has continued to improve as evidenced by economic conditions buoyed by dynamic domestic demand and the good performance of external accounts. A programme of structural reforms initiated under IMF auspices has been bolstering that improvement.

Overindebtedness has been decreasing thanks to a substantial increase in private remittances, a high level of currency reserves, and notable reduction of public sector debt ratios underpinned by disciplined fiscal policy. However, the structural problems hampering the country’s economy have persisted. Its specialisation has remained focused on low value-added goods with the weight of the farm sector exposing economic performance to the vagaries of weather. Political risk has remained high. Although Pervez Musharraf’s position has been shaky, the army is still very powerful, so much so that a scenario of a break-off with current pro-Western strategy seems highly unlikely. Moreover, relations with India have been progressively improving even if the debate over the thorny Kashmir question has remained very difficult

INDIA: positive watchlisted A4 rating amid strong economic growth and improved company payment behaviour. Although the Congress Party’s unexpected success in the May 2004 legislative elections rattled financial markets, it should nonetheless have little impact on the country’s very strong growth. Robust domestic demand from an emerging middle class, essentially urban and employed in the rapidly expanding services sector, has been buoying economic activity, which is of course also still dependent on an agricultural farm sector that supports 65% of India’s population and thus on weather conditions. However, that vulnerability seems to be progressively smaller due to the boom in services. With exports continuing to grow strongly and private remittances remaining very high, the country has been able to post a remarkable increase in currency reserves and marked improvement in external debt ratios. The government’s financial situation has nonetheless remained in poor shape with the lack of fiscal adjustments causing an accumulation of public sector debt unsustainable in the medium term. Politically, the situation with Pakistan has eased and the new government should continue the dialogue engaged between the two countries. The delicate Kashmir question will probably give rise to very difficult talks. The Coface payment incident index for Indian companies — long above the world average due to the frequency of late payments by companies — has fallen sharply in the past year thanks to the favourable economic environment. A persistent lack of financial transparency nonetheless still characterises Indian companies.