By Michael Dwyer
Sept. 24 (Bloomberg) -- Pakistan President Asif Ali Zardari will ask the U.S., U.K. and other industrial nations for financial aid amid concern South Asia's second-largest economy is in danger of defaulting on its debt.
Zardari will seek ``economic assistance'' at a meeting in New York on Sept. 26 with U.S. Secretary of State Condoleezza Rice and representatives of other Group of Eight countries, according to the state-run Associated Press of Pakistan. Moody's Investors Service lowered Pakistan's credit outlook to negative yesterday, citing a risk of ``missed repayments.''
``Pakistan has no other option but to extend a begging bowl,'' said Haider Hussain, an economist at Elixir Securities Ltd. in Karachi. ``A negative outlook may damage Pakistan's overall posture, eroding foreign investors' confidence.''
Pakistan is the world's riskiest government borrower, according to credit-default swap prices from CMA Datavision, with investors concerned by a deterioration in security that saw 53 people killed in a weekend bomb attack on the Islamabad Marriott hotel. The nation is running short of money to repay state debt, as foreign-exchange reserves have almost halved to $9.16 billion in early September from $16.5 billion a year ago.
``The fall in forex reserves, especially if combined with substantial capital flight, could see Pakistan resort to borrowing from international agencies,'' said Maheen Rahman, head of research at BMA Capital Management Ltd. in Karachi. ``The pressure is intense and will only get worse in the absence of significant foreign inflows to fund the external deficit.''
The Pakistani rupee has plunged 21 percent against the dollar this year amid higher payments for imported oil that widened the current account deficit to a record $14 billion in the year ended June 30.
Foreign Reserves
The currency gained 0.04 percent to 78.17 per dollar as of 5 p.m. in Karachi. The government's bond due 2036 rose for the first time in nine days, lowering the yield to 10.29 percent from 10.32 percent.
``In the end I can imagine there will be some assistance from foreign countries, maybe some IMF program, some help from other sovereign national organizations,'' said Anton Hauser, a fund manager who helps oversee $2.4 billion of emerging-market debt at Vienna-based Erste Sparinvest KAG, and owns about $6 million of Pakistan's dollar-denominated debt. ``There'll definitely be conditions from the IMF program in fiscal policies, leading to some adjustment in the current account.''
Finance Minister Naveed Qamar announced a four-point ``economic stabilization plan'' at a press conference on last week with central bank governor Shamshad Akhtar, aiming to restore investor confidence in the $146 billion economy.
Pakistan will increase domestic finances through asset sales, eliminate subsidies on power and fuel by June 2009 and raise funds from overseas, Qamar told reporters in Islamabad.
Political Uncertainty
The measures may help revive a sliding economy that's forecast to grow at the slowest pace since 2003 and bridge the budget deficit, which is at 10-year high. Qamar's efforts have been hampered by six months of political uncertainty following the March election of Pakistan's first civilian government since 1999 and strained relations with the U.S. after the ruling coalition forced President Pervez Musharraf to resign in August.
The Bush administration has increased pressure on Prime Minister Yousuf Raza Gilani's government to do more to curb rising militancy in Pakistan and the U.S.-led forces in neighboring Afghanistan have increased cross-border raids against pro-Taliban and al-Qaeda militants.
Default Risk
Investors aren't convinced that government efforts to stimulate economic growth will succeed.
Karachi's KSE100 Index has lost more than a third of its value this year, ranking behind only China and Vietnam as Asia's worst-performing benchmark stock index. The index fell 0.1 percent to 9,190.75 after a one-month ban on short selling started today.
Credit-default swaps on Pakistan's $2.7 billion of dollar- denominated bonds outstanding have jumped to 1,500 basis points. That means it costs $1.5 million annually to protect $10 million of the country's debt from default for five years, triple the cost on Lebanon's debt, according to data compiled by Bloomberg.
Credit-default swaps, financial instruments based on bonds or loans, were conceived to protect bondholders by paying the buyer face value in exchange for the underlying securities should the borrower default. An increase indicates a deterioration in the perception of credit quality.
``Investors feel that their funds will not be safe and that is why they are reluctant to invest,'' said Mohammed Sohail, director of research at JS Global Capital Ltd. in Karachi.
`Corrective Measures'
Governor Akhtar said last week that ``corrective measures'' have been taken to prevent the slide of the rupee and that the central bank doesn't want to manage the exchange rate.
The State Bank of Pakistan raised its benchmark interest rate by one percentage point to 13 percent on July 29, the third increase in 2008 to ease inflation that reached a 30-year high last month.
``The government's inability thus far in securing external financing is fast draining forex reserves, causing the rupee to slide endlessly,'' said Asif Ali Qureshi, head of research at Invisor Securities Ltd. in Karachi. ``It may well be the time for the authorities to reconsider their pledge to the flexible exchange-rate regime.''
To contact the reporter on this story: Michael Dwyer in Singapore at Mdwyer5@bloomberg.net.
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