The Default Risk Surges
Doubts have been raised that Pakistan will default on its debt just as it starts to revive investor interest with a reduction in terrorist attacks.
Credit default swaps protecting the nation’s debt against non-payment for five years have surged steeply. This is said to be the steepest jump after Greece, Venezuela and Portugal among more than 50 sovereign states. About 42 percent of Pakistan’s outstanding debt is due to mature in 2016 — roughly $50 billion, equivalent to the size of Slovenia’s economy.
Prime Minister Nawaz Sharif has worked to make Pakistan more investor-friendly since winning a $6.6 billion International Monetary Fund loan in 2013 to avert an external payments crisis. The economy is forecast to grow at 4.5 percent, an eightyear high, as a crackdown on militant strongholds helps reduce deaths from terrorist attacks.
It is being said that Pakistan’s high level of public debt, with a large portion financed through short-term instruments, does make the country’s ability to meet its financing needs more sensitive to market conditions.
Since Nawaz Sharif took the loan, Pakistan’s debt due by end-2016 has jumped about 79 percent. He’s also facing resistance in meeting IMF demands to privatize state-owned companies, leading to a strike at Pakistan International Airlines.
The bulk of this year’s debt, some $30 billion, will be due between July and September, and repayments will get tougher if borrowing costs rise more. The spread between Pakistan’s 10-year sovereign bond and similar-maturity U.S. Treasuries has touched a one-year high.
If Pakistan’s debt servicing costs rise, Nawaz Sharif will not have much room to maneuver. Already about 77 percent of the country’s 13 trillion rupees ($124 billion) budget for the year through June 30 is earmarked for interest and principal repayment on loans.
But it seems there’s not much reason to panic. Pakistan’s external liabilities are said to be relatively modest, its foreign-currency reserves have risen, the IMF is ready to help meet maturing loans and Chinese investment through CEPAK is on its way.
It is hoped that improving growth prospects, lower inflation and a smaller budget deficit would help to underpin investor confidence, particularly the domestic investor base.
It is also true that Pakistan is committed to successfully implementing its IMF macroeconomic stability program and the Nawaz Sharif administration has a “quite good” chance of completing the program, according to IMF mission chief Herald Finger.
Only 17 percent — or $8.3 billion — of Pakistan’s 2016 bond and loan repayments will need to be in foreign currency. That accounts for 40 percent of the nation’s $21 billion in foreign-exchange holdings.
That stockpile, however, isn’t airtight. While it increased by more than 55 percent in 2015 — the steepest rise in Asia — more than half consists of debt and grants that could leave the country quickly if global risk appetite worsens. Outflows would weaken the rupee, a currency that is estimated by the IMF to be as much as 20 percent overvalued even though it has proved remarkably stable in the middle of the recent market turmoil.
Investors should expect volatility in bonds and pressure on the rupee in 2016, according to financial experts. The plunge in oil prices also helped the government greatly in 2015, predicting a positive outlook.
Another worry, as ever in Pakistan, is political instability. The military has ruled the country for most of the time since independence in 1947, and General Raheel Sharif — no relation to the prime minister — has boosted the army’s image with a campaign – Operation Zarb e Azb - to root out terrorists from the country.
Raheel Sharif has said he plans to retire when his term ends in November 2016, but the risk of political upheaval is ever present. Pakistan has the 10th highest political risk score among more than 120 countries in the Economist Intelligence Unit ranking. This is worse than Egypt and Iran. This means that the country has a lot more work to do and it is obvious that many steps are being taken in that direction. It is also true that the Pakistani economy is picking up – slowly but surely – and if it were not for some major areas of corruption – both at the centre and in the provinces – the country has all the potential to crawl out of the hole it has dug for itself – and become an economy to contend with.