By Naween A. Mangi
“The credit-default swap rate for Pakistan is still high so to go to cold-nosed commercial markets wouldn’t suit us,” Raza, 63, who worked for Citigroup Inc. for 36 years in the Middle East, Africa and Europe, said in an interview. “But there are a number of countries in the region who understand Pakistan’s politics very well.”
Raza, who took over as governor on Jan. 2, is seeking to revive Pakistan’s faltering economy as political tensions distract the government from tackling slowing growth and worsening security. President Asif Ali Zardari’s hold on power was weakened yesterday when he relented to pressure from opposition leader Nawaz Sharif and reinstated judges fired under military rule in 2007.
“The state of global financial markets will decide whether Pakistan can tap them for a bond issue, but currently it looks very difficult,” said Farid Khan, director at Credit Suisse Pakistan in Karachi. “Indonesia just raised $3 billion at a prohibitive cost of 840 basis points over U.S. Treasuries and Pakistan’s pricing will be worse.”
Pakistan is aiming to raise funds as the global economy’s worst crisis since the Great Depression prompts investors to avoid riskier emerging markets. Indonesia, rated four levels above Pakistan, last month paid double the premium over U.S. treasuries it paid in June.
Middle East investors may also be reluctant to buy Pakistan debt as their economies slow amid lower crude oil prices, which have fallen more than $100 from a July high of $147.27 a barrel.
The economy of the Gulf Cooperation Council, which includes Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Oman and Bahrain, is forecast to contract by 2.4 percent in 2009, after expanding 5.2 percent in 2008, according to a Jan. 22 report by the Kuwait-based Global Investment House.
Pakistan’s government debt is the riskiest in the world after Argentina and the Ukraine, according to credit-default swap prices from CMA Datavision. It costs $2.3 million annually to protect $10 million of the country’s debt from default for five years.
Still, the cost to investors of protecting Pakistan debt has more than halved since October after the South Asian nation was forced to seek a $7.6 billion bailout from the International Monetary Fund. The price of Pakistan credit-default swaps has dropped to 2,324 basis points on March 13 from as high as 5,101.7 on Oct. 27.
Political Confrontation
Protests this weekend sharpened a nearly three-week old confrontation that began Feb. 25, when the Supreme Court barred Sharif, Zardari’s chief rival and a former prime minister, from holding public office. U.S. Secretary of State Hillary Clinton has urged Zardari and Sharif to calm the conflict.
“The political turmoil is going to hit the economy from all sides, especially hurting foreign investment and consumer confidence,” Credit Suisse’s Khan said. “The timing of this political storm couldn’t have been worse.”
Tumult in domestic politics since Zardari’s government was elected in February 2008 has hurt the administration’s efforts to raise investment and boost growth. The economy is forecast by the government to expand 2.5 percent this year, compared with 5.8 percent last year.
Additional IMF Loan
Pakistan may not necessarily need to ask the IMF for an additional $4.5 billion, Raza said in the March 13 interview in Karachi. Finance Adviser Shaukat Tarin said last month the nation would seek the additional funding.
“No matter how bitter politics get, as long as they’re not disrupting the flow of commerce, it doesn’t really affect the economy that much,” said Raza, who has a master’s degree in philosophy, politics and economics from Oxford University. “The initial purpose of the IMF program and our success in living within its stipulations would be to reattract investors.”
Foreign investors are deterred by low ratings on Pakistan. Standard & Poor’s rates the nation’s debt CCC+, seven levels below investment grade.
“If foreign investors see more risk in Pakistan, their flows won’t fall off more than now,” said Raza, who lived in London for 25 years. “Domestic investors have seen periods of instability for so long that they look over the valley towards the hills.”
Overseas direct investment in Pakistan rose 1.3 percent to $2.59 billion in the seven months ended Jan. 31, according to central bank data.
‘Quick to Upgrade’
“I don’t think rating agencies will be very quick to upgrade anyone,” said Raza. “But for Pakistan it looks better and better.”
The country’s trade deficit narrowed by 60 percent in February and the budget gap is forecast to decline to 4.3 percent of gross domestic product in the 12 months ending June 30, from 8 percent a year ago, after the government ended subsidies on fuel and electricity.
“A break in fiscal discipline and a revival of inflation worry me the most,” said Raza. The central bank plans to cut interest rates from the highest in more than a decade in the next few months as inflation slows and the nation’s foreign reserves grow, he said.
“Raza’s single biggest challenge is to ensure he doesn’t take an eye off bringing inflation down because there are immense pressures to ease monetary policy,” said Zakir Mahmood, chief executive officer of Habib Bank Ltd., the second biggest in Pakistan by assets. “His challenge is to ensure that doesn’t happen prematurely.”
Borrowing Costs
The bank raised borrowing costs four times last year as inflation accelerated to a three-decade high.
“The risk of too sharp a cut is to convey the feeling that the battle against inflation has been won and unfortunately, that’s not true,” Raza said. “But with things going in the right direction, the stage is set within the next couple of months for an opportunity to lower the rate.”
The central bank predicts inflation mayp«8Öe to 11 percent by June from 21.07 percent last month.
“The biggest challenge for Pakistan is that we cannot afford fiscal stimulation. Foreign investment has slowed down and so stimulation has to come from banking,” said Raza. “Banks are pulling their horns in a bit and we can relax regulation but we can’t take the fear out.”
Bank loans to private companies fell to 133.1 billion rupees ($1.65 billion) in the eight months ended Feb. 28, compared with 289.3 billion rupees a year earlier, according to central bank data.
“The governor’s biggest challenge is to introduce realism in banking, which is missing,” said Hasan Bilgrami, chief executive officer at Bank Islami Ltd., an Islamic bank. “The amending of rules according to the environment happens everywhere in the world but here.”
To contact the reporter on this story: Naween A. Mangi in Karachi, Pakistan on Nmangi1@bloomberg.net.
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