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03 December 2023

Credit world watches with caution

By Vigyan Arya



Pakistan’s economic credibility has plunged following the killing of Benazir Bhutto. The risk of Pakistan defaulting on its debt climbed the most since July within hours of the attack.

Pakistan credit-default swaps, which rise as concern over credit quality increases, leaped to 505 basis points from 405 basis points on December 21, according to New York brokers Phoenix Partners Group. And investors have been acting to protect their positions. The Swiss franc, a traditional haven for those seeking to reduce monetary risk, gained the most in more than three weeks against the dollar. Gold and oil prices also rose.

The increased risk of Pakistan defaulting on its international debt is bound to harm the country’s credit-worthiness, said Maqsood Alam, a senior financial analyst at the Karachi Stock Exchange.

“Political and social instability is to be expected but the repercussions of this unfortunate incident will damage the economic image of the country for the immediate future,” he said.

Trading at Pakistan’s stock market – which has risen 47 per cent this year – has been suspended for three days as the country mourns. But dealers in the UAE fear investors will be reluctant to continue to put their money into the country when the exchange reopens.

Trader Hukmah Zabir of Deira said: “In the last 24 hours more than 90 per cent of my clients have told me to stop making any further investments in Pakistan.

“After a steady climb in the last year this is disastrous and most of my clients are apprehensive. We have had some investors from Turkey showing interest in the market, but convincing them and others to maintain their confidence in Pakistani stocks now will be an uphill task.”

Risk factors have been a matter of concern for the market for the past six months. Political disturbances have rocked the country since July and bomb attacks by militants have left 600 dead in that time.

The worst setback was when President Pervez Musharraf ordered troops to raid the Red Mosque in Islamabad to end a challenge by clerics seeking to impose Islamic law. “Since then the market worm has been on a slow decline,” said Zabir.

The violence caused the cost of credit-default swaps on Pakistan’s debt to more than triple this year. The cost of the contracts is higher than those for any of the 51 countries and government-sponsored banks whose swaps are tracked by agencies, including Argentina, Venezuela and Kazakhstan.

Yields on Pakistan’s benchmark 6.875 per cent dollar bonds due in 2017 have risen 1.45 percentage point since they began trading in May to 8.43 per cent, according to ING Bank NV.

The bonds’ price has fallen nine cents on the dollar to

90 cents.

Fund manager Tim Love of London’s Cazenove Capital Management said: “Bhutto’s death raises geopolitical and risk-aversion issues, which are already at a high level. There is potential for a disproportionate effect given the market fragility as a result of the solvency issues.”

Pakistan has $35 billion (Dh128.45bn) of sovereign debt outstanding, according to available data until the end of 2006.


The value of the Pakistan rupee is expected to slump on Monday, when the nation’s financial institutions return to business after a two-day suspension to mark the death of Benazir Bhutto.

The rupee was last quoted at 61.40 against the dollar, just off a three-year low, and will be suspended until President Pervez Musharraf re-opens the nation’s banks and financial markets on Monday.

The currency’s last position was unaffected by the assassination, which took place after the markets closed on Thursday.

As riots broke out in the port city of Karachi, investors predicted stocks, bonds and the currency would slump.

Credit ratings agency Standard & Poor’s also said Pakistan’s sovereign foreign currency rating of B+ could be lowered if the assassination was followed by instability, making it more difficult for the country to borrow money in global markets.

But other Asian currencies saw rises in the immediate aftermath of Bhutto’s death. India’s rupee fell on speculation global funds will avoid the region. (Ryan Harrison)