Pakistan post-election peace dividend undermined by looming IMF repayment


Matthew Turner
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Pakistan’s post-election dreams are crashing back to economic reality as a growing debt burden binds the new government’s nation-building bid.

Pakistan’s centre-right Pakistan Muslim League-Nawaz (PML-N) party swept to power last week after taking 35% of votes, enough for it to take a majority in parliament.

The election was widely hailed by commentators as representing another step on the country’s road to democracy, as it was the first civilian transfer of power in Pakistan’s history and the there was a 60% voter turnout, up from 44% in 2008.

Pakistan’s new prime minister Nawaz Sharif plans to introduce a raft of private sector initiatives in the energy and banking sectors, reflecting the party’s record of business-friendly policies.

“Given an experienced economic team and past record of business-friendly policies, capital markets will welcome a PML-N government with a likely re-rating,” according to a report by Credit Suisse.

“A focus on infrastructure projects and exports would be positive for cements, textiles and steel, while progress on circular debt would improve the outlook for energy.”

However, Sharif’s biggest challenge will be in tackling the swarm of corruption allegations, which has marred Pakistan’s political landscape this past decade.

ECR economists cast an upbeat tone on the country’s demographic and structural trends but painted a bleaker economic outlook. Bucking the largely positive reaction to the election result, country risk experts downgraded Pakistan’s ECR score by 0.4 points to 27.2 points in the aftermath of the election.

Nevertheless, Pakistan’s apparent democratic consolidation has, on the whole, gone down well with political commentators and market experts.

Allan Dwyer, economics professor at Mount Royal University and one of ECR’s expert contributors for Pakistan, says: “I am optimistic about demographic and structural factors.

“This election proves that the human capital in Pakistan is of a higher level of commitment to the rule of law and democracy than traditionally thought – 60% voter turnout, 45-55 female-male participation: this is all really good stuff and bodes well in the long term for economic growth.”

Nevertheless, the country’s tortuous IMF debt repayment brings the country’s broken economy into light. The IMF, at a press conference on May 9, stressed the urgency of laying the groundwork for future growth and debt maturity.

Dwyer says this repayment is the largest threat to Pakistan’s credit profile. “I am mainly concerned in economic terms about the looming IMF repayment due in 2015 – $7.5 billion,” he says.

“Pakistan shows no sign of being able to assemble the resources now that are needed to have that payment ready to go.”
Government debt is expected to reach 64.1% of GDP in 2013, while the country’s deficit widened to $4.5 billion in 2012, or 2% of GDP, according to IMF estimates.

“There is a slight chance that the Eurobond markets could be tapped by PK to gather some of that $7.5 billion but I sense a growing fatigue among investors in terms of emerging market sovereign debt,” says Dwyer.

“Though bond yields for the PK USD long bond (see attached graph) are dropping and this bodes well for future bond issuance, the economy just doesn’t have the capacity to generate the taxes and returns that the government needs to have a viable shot at that 2015 IMF due date.”

Pakistan’s sovereign CDS spreads have widened 30 basis points since April. The current 10-year CDS level for Pakistan is 797bp versus Friday’s closure of 749bp, according to Markit data.


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