Is Pakistan’s Economy Poised for Rebound?
By Riaz Haq
CA
Amidst major counterinsurgency operations in and around Swat Valley and growing refugee crisis, there are signs of optimism by investors and bond holders in Pakistan's economy. The KSE-100, Karachi's stock index, is up 27 percent this year, compared to a 12 percent gain in MSCI’s emerging-market stock index of 26 emerging economies, including Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela. The Pakistani rupee, which declined 22 percent against the dollar last year, the second-worst performer in Asia, fell 1.8 percent this year.
Pakistan’s 6.875 percent dollar bond maturing in June 2017 yielded 18.62 percent last month, versus a record high of 26.30 percent on Nov. 3, 2008, according to data compiled by Bloomberg. The price has climbed to 52 cents on the dollar, from as low as 35 cents last year. “Broadly, we believe that it definitely doesn’t look as bleak for Pakistan,” said Joel Kim, who helps oversee $433 billion globally as head of Asian debt at ING Investment Management in Hong Kong. “They’ve passed the worst point. The IMF money has helped stabilize things.” But Pakistan's bond risk still remains high: Five-year credit default swaps based on Pakistan’s bonds show investors need to pay $2.2 million annually to protect $10 million of Pakistan’s debt for five years, the third-highest in the world, according to CMA Datavision. As recently as June of last year, Pakistan sovereign debt credit default swaps (CDS) traded at 530 basis points in Hong Kong, meaning it cost $530,000 a year to protect $10 million of Pakistan's debt from default for five years.
Terrorism has cost Pakistan $35 billion in economic losses and damage to infrastructure, according to a statement given to reporters by President Asif Ali Zardari’s aide on April 17. More than 3,500 terrorist incidents have occurred since 2007, killing an average of 84 people per month this year, the aide said.
In addition to the $7.6 billion loan from IMF, Pakistan has been promised $5.3 billion in aid by more than 20 countries to help shore up its economy and combat al-Qaeda and Taliban militants. While the political risk in the country remains high, the flow of loans and aid is helping shore up the nation's economy. Pakistani business officials say the perception of political risk is overstated and international investors are starting to return.
Foreign direct investment fell to $5.19 billion in the year ending June 30, 2008, from a record $8.43 billion a year earlier, government data show.
“There are now very early signs of portfolio investment starting to come back,” Asad Umar, the president of Karachi-based Engro Chemical Pakistan Ltd., told Bloomberg TV in a recent interview in New York. “Pakistan is going to come out of it earlier than the rest of the globe.”
The IMF forecasts the economy will expand 2.5 percent in the 12 months ending June 30, the slowest pace in eight years, after growing at an average annual pace of 6.8 percent since 2002. The State Bank of Pakistan forecast in April that economic growth for the year through June will slump to between 2.5 percent and 3.5 percent, far below the 5.5 percent the government has projected -- and too slow to create the 2.5m jobs a year for its fast-growing population of about 170 million people. During 2002 to 2007, Pakistan's economy grew at an average rate of 7% annually, creating about 2.5m jobs a year, barely keeping up with the number of young people ready to join the work force each year, according to Salman Shah, senior economic adviser to former President Musharraf of Pakistan. However, the current economic slowdown has resulted in significant job losses in almost all private sectors of the economy, increasing visible signs of poverty. According to a BBC report last year, three times a day, hundreds of men, women and children line up outside dozens of Karachi restaurants for meals which are paid for by philanthropists and charity donors. These lines were considerably shorter, or non-existent until early 2008. Many of those lining up are industrial workers who have lost their jobs.
Pakistani military's robust response to the rising militancy appears to be backed by a significant majority of the people. If the Pakistani political leadership can deal with its fall-out, such as the refugee crisis, and sustain the popular support for the ongoing military action, and the government executes a reasonable set of economic policies, it is quite reasonable to expect an economic rebound within a year. Given strong underlying growth dynamics in South Asia, the negative feedback effects of the global financial crisis should be temporary as well. A relatively rapid rebound can be expected in 2010, with a projected revival of GDP growth to 7 per cent, spurring job growth again.
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