The De­fault Risk Surges

Enterprise - - Editor’s desk -

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.

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