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Pakistan default risk surges as US$50 billion debt bill coming due

[PAKISTAN] Bets are rising that Pakistan will default on its debt just as it starts to revive investor interest with a reduction in terrorist attacks.

Credit default swaps protecting the nation's debt against non-payment for five years surged 56 basis points over the past week amid the global market sell-off, the steepest jump after Greece, Venezuela and Portugal among more than 50 sovereigns tracked by Bloomberg. About 42 per cent of Pakistan's outstanding debt is due to mature in 2016 - roughly US$50 billion, equivalent to the size of Slovenia's economy.

Prime Minister Nawaz Sharif has worked to make Pakistan more investor-friendly since winning a US$6.6 billion International Monetary Fund loan in 2013 to avert an external payments crisis. The economy is forecast to grow 4.5 per cent, an eight-year high, as a crackdown on militant strongholds helps reduce deaths from terrorist attacks.

"Pakistan's high level of public debt, with a large portion financed through short-term instruments, does make the sovereign's ability to meet their financing needs more sensitive to market conditions," Mervyn Tang, lead analyst for Pakistan at Fitch Ratings, said by e-mail.

Since Mr Sharif took the loan, Pakistan's debt due by end-2016 has jumped about 79 per cent. He's also facing resistance in meeting IMF demands to privatize state-owned companies, leading to a strike this month at national carrier Pakistan International Airlines Corp.

The bulk of this year's debt, some US$30 billion, is due between July and September, and repayments will get tougher if borrowing costs rise more. The spread between Pakistan's 10-year sovereign bond and similar-maturity US Treasuries touched a one-year high on Thursday.

If Pakistan's debt servicing costs rise, Mr Sharif doesn't have much room to maneuver. Already about 77 per cent of the country's 13 trillion rupees (S$173.2 billion) budget for the year through June 30 is earmarked for interest and principal repayment on loans.

Right now, there's not much reason to panic. Fitch's Tang says Pakistan's external liabilities are "relatively modest," foreign-currency reserves have risen, the IMF is ready to help meet maturing loans and Chinese investment in an economic corridor is on its way.

"Improving growth prospects, lower inflation and smaller budget deficit should help to underpin investor confidence, particularly the domestic investor base," Tang said.

S. Javed, a spokesman for Pakistan's Finance Ministry, didn't respond to emailed questions. Pakistan is committed to successfully implement its IMF macroeconomic stability programme, the Finance Ministry said in a statement Feb 1. Mr Sharif's administration has a "quite good" chance of completing the programme, IMF mission chief Harald Finger said last month.  Only 17 per cent - or US$8.3 billion - of Pakistan's 2016 bond and loan repayments will need to be in foreign currency. That accounts for 40 per cent of the nation's $21 billion in foreign-exchange holdings.

That stockpile, however, isn't airtight. While it increased by more than 55 per cent last year - the steepest rise in Asia - more than half consists of debt and grants that could leave the country quickly if global risk appetite worsens. Outflows would weaken the rupee, a currency that is estimated by the IMF to be as much as 20 per cent overvalued even though it's proved remarkably stable amid the recent market turmoil.

Investors should expect volatility in bonds and pressure on the rupee this year, according to Mustafa Pasha, head of investments at Lakson Investments, which manages US$200 million of Pakistani stocks and bonds.

While the plunge in oil prices helped the government last year, predicting the outlook would be like "reading the tea leaves," he said by phone from Karachi.

Another worry, as ever in Pakistan, is political stability. The military has ruled the country for most of the time since independence in 1947, and General Raheel Sharif - no relation to the prime minister - has boosted the army's image with a campaign to root out terrorists who massacred 134 children in 2014.

While Raheel Sharif has said he plans to retire when his term ends in November, the risk of political upheaval is ever present. Pakistan has the 10th highest political risk score among more than 120 countries in the Economist Intelligence Unit ranking, worse than Egypt and Iran.