Pakistan Tops Dollar Bond Performance in Asia

24-04-2009: Despite continued uncertainty, the world's largest dollar bond investors are continuing to maintain holdings in Pakistan. According to HSBC, Pakistani bonds have returned 35 percent this year, the best performance in Asia among dollar debt indexes compiled by London-based HSBC. ING Groep NV, Erste Sparinvest KAG and HSBC Holdings Plc, which oversee more than $800 billion in assets, are maintaining holdings of Pakistan’s dollar bonds as almost $13 billion in assistance from the International Monetary Fund and aid pledges help the country stave off default. Pakistan’s 6.875 percent dollar bond maturing in June 2017 yielded 18.62 percent yesterday, versus a record high of 26.30 percent on Nov. 3, 2008, according to data compiled by Bloomberg. The Karachi stock index is up 27 percent this year, compared with a 12 percent gain in MSCI’s emerging-market stock index. Pakistan also won promises this month for $5.3 billion in aid from more than 20 countries to help shore up its economy and combat al-Qaeda and Taliban militants.( Reference )

Past and the Present

The Past Under the Military Regime

The Present (and the Future?? )

The military rule that stretched from 1999 to early 2008, had many ups and finally a bleak down. From thriving economy and building of Forex reserves from mere US $ 500 miilion to all time US $ 16 billion, lot of water flowed under the bridge. As per the Ministry of Finance, Government of Pakistan, despite an extra-ordinary surge in oil prices and the devastation caused by the earthquake of October 8, 2005 Pakistan's economy continued to maintain a solid pace of expansion in 2005-06. Pakistan's economy has proved itself as remarkably resilient in the face of shocks of extra-ordinary proportions. The magnitude of growth that Pakistan has achieved during the last four years in a row has positioned Pakistan as one of the fastest growing economies in the Asian region. This growth momentum is underpinned by wide-ranging structural reforms, macroeconomic stability, and consistency and continuity in policies.

For years since 1970 onwards, Pakistan had a poor track record of saving and heavy dependence on the IMF and the World Bank for assistance in developing its basic infrastructure. However, in recent years, the government has taken some prudent mid to long term steps to revive its economy, which has started showing its results. Perhaps for the first time in its history, Pakistan has not only repaid sizeable portion of its foreign debt, but has also decided not to take any more loans.  The country's GDP now stands at 4% from 2% in the 90s. The on going peace talks with India have further reduced the tension between the two countries, which has given boost to its economy and foreign trade. Pakistan now stands at the cross roads and hopes of better future are in sight - a fact now often acknowledged by the world economic bodies.

The GDP growth remained in the 6-8% range in 2004-06. In 2005, the World Bank named Pakistan the top reformer in its region and in the top 10 reformers globally.

The government and the financial wizards steadily raised the development spending in recent years, including a 52% real increase in the budget allocation for development in FY07. The fiscal deficit - the result of chronically low tax collection and increased spending, including reconstruction costs from the devastating Kashmir earthquake in 2005 was manageable. Development in urban areas of Pakistan has remained high but is low in rural areas.

Index of Economic Freedom: There are yet other signs of recovery in the economy of Pakistan. Recently, the Index of "economic freedom" has placed Pakistan on the 110th slot in the current year (2006), considerably higher than the 133rd position on which it stood in 2005, on a scale of 1-155.

Pakistan has three stock exchanges, established each in Karachi, Lahore and Islamabad. The Karachi Stock Exchange (KSE) is the more dynamic and volume based as compared to the rest of the two. The KSE was initially 50 50 companies based, but was elevated to KSE-100 on 1 November, 1991 and presently ranks as one of the most accepted Exchange in the region. The KSE-100 is a capital weighted index and represents about 86 percent of market capitalization of the Exchange. In 1995 the KSE all share index was constructed and introduced on September 18. The KSE has seen an up rise trend recently, though after crossing 10,000 mark, it plummeted a few months ago, crashing billions of rupees of investors. However, it has again picked up and at this time, the KSE-100 index has crossed 11,000 mark. The Lahore (LSE) and Islamabad (ISE) stock markets are heavily affected by performance of KSE - in fact all three stock exchanges rise and fall together.

Karachi Stock Exchange was declared as the “Best Performing Stock Market of The World" in 2002. KSE has been well into the 3rd year of being one of the Best Performing Markets of the world as declared by the international magazine “Business Week”. Similarly the US newspaper, USA Today, termed Karachi Stock Exchange as one of the best performing bourses in the world.

However, soon cracks started appearing in the economy in the early 2008, mainly due to soaring oil prices and which multiplied the oil bill many times. Suddenly a well meaning economy started to crumble - The inflation which continued to rise in previous years, though at a lower pace, suddenly jumped to almost 29% in 2008 as compared to 9% in 2005 The rupee currently stands at 80 against one US dollar whereas just six months ago, one dollar was equal to Rs 60. The country’s trade deficit stands at 12 billion dollars, which is the highest ever in its 61-year old history. The country's stock exchanges are at all time low and there is no signs of recovery. Once thriving KSE-100 index of over 15000 points is at a record low around 9,187 on 21 November 2008. The 2008 onwards, Pakistan's economic is nose diving rapidly and alarmingly.

The State Bank of Pakistan, though enforced tighter monetary grip, could not harness the growing inflation and the current account deficit - driven by a widening trade gap as import growth outstrips export expansion - and had to draw down reserves and dampen GDP growth in the medium term.

Security concerns stemming from the nation's role in the War on Terror have created great instability and led to a decline in FDI from a height of approximately $8 bn to $3.5bn for the current fiscal year. Concurrently, the insurgency has forced massive capital flight from Pakistan to the Gulf. Combined with high global commodity prices, the dual impact has shocked Pakistan's economy, with gaping trade deficits, high inflation and a crash in the value of the Rupee, which has fallen from 60-1 USD to over 80-1 USD in a few months. For the first time in years, the government has decided to seek loans and aids from donor agencies, including the IMF - which once the previous PM Shaukat Aziz once claimed that we have shut the doors of IMF. Pakistan is also turning to the "Friends of Pakistan" for assistance and support - which so far hasn't come or being promised.  The precarious economic situation has resulted in S&P lowering Pakistan’s foreign currency debt rating to CCC-plus from B, just several notches above a level that would indicate default. Pakistan’s local currency debt rating was lowered to B-minus from BB-minus. Credit agency Moody’s Investors Service cut its outlook on Pakistan’s debt to negative from stable due to political uncertainty, though it maintained the country’s rating at B2.The cost of protection against a default in Pakistan’s sovereign debt trades at 1,800 basis points, according to its five year credit default swap, a level that indicates investors believe the country is already in or will soon be in default.

The middle term however may be less turbulent, depending on the political environment. The EIU estimates that inflation should drop back to single digits in 2010, and that growth should pick up to over 5% per annum by 2011. Although less then the previous 5 year average of 7%, it would represent a overcoming of the present crisis wherein growth is a mere 3.5-4%

As of now, Pakistan urgently needs at least $3 billion -- and as much as $5 billion and has requested the IMF for as much as $10 billion. "If Pakistan doesn't get the money, there may be a repeat of freezing foreign currency accounts, foreign currency rationing and, eventually, a default on its sovereign loans," the Minister in-charge for economic affairs, Mr Shaukat Tarin is reported to have said. The government hopes that China, the United States or Saudi Arabia would lend cash or oil rebates, but all three have made it clear they aren't able or willing to do that just yet.

Pakistan is also looking to the newly created Friends of Pakistan group, which includes some of the richest countries in the world. But U.S. Assistant Secretary of State Richard Boucher, who attended the group's second meeting Monday in Islamabad, told reporters that "it's not a cash advance. … The goal is not to put money on the table but to look as to how to supplement Pakistan's efforts."

This puts Pakistan into the arms of the IMF once again, which will comply to Pakistan's needs only if politically unpopular concessions are announced by the GOP, which will draw criticism from across the country and may tarnish its political image - since many believe that Pakistan with some better management of the economy can still sustain the crisis without IMF's help.

So today Pakistan's economy stands at a crossroads - either to take a healthy upward trend or continue with the stalemate. Many believe for the good since Pakistan with its external debt to GDP ratio of 28% is much better placed as compared to Iceland's 545% and Ukrainian's 71%.