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Pakistan: beyond the headlines

Those in the western media automatically link the name Pakistan with
lawlessness and imminent collapse ­ ‘Pakistan on the brink’ and ‘Turbulence
engulfs Pakistan’ could be inserted as default headlines on almost any US or
European newspaper. For most commentators, Benazir Bhutto’s assassination last
December was the final straw. It is now only a matter of weeks before Pakistan,
a refuge for big-bearded mullahs and Islamist terrorists, is tipped over the

That is Pakistan ‘A’. Running in tandem with the political turmoil is
Pakistan ‘B’, whose central bank has more than $15.6bn in its coffers to deal
with weaknesses in the rupee, up from $12.7bn a year ago.

Analysts close to the situation, like economist Ahsan Chishty at Standard
Chartered in Karachi, still expect $3bn in FDI in the next six months. Barclays
was granted a banking licence in December and plans to initially open 10
branches in the country. Oman’s Bank Muscat and Japan’s Nomura agreed last month
to acquire Pakistan’s Saudi Pak Bank for $200m, pushing ahead with the deal
despite the political crisis.

The Karachi stock market is up 50% year-to-date, making it one of Asia’s top
performing indices. Real GDP growth is forecast to rise 6.5% in fiscal 2007-08,
inflation is slowing to a targeted 6.8%, and Moody’s external vulnerability
indicator, using debt/FX reserves, stands at 18.9%, roughly similar to last
year’s level and down from 41.7% five years ago.

Bouncing back
Pakistan’s failure to comply with populist doomesday predictions from the west
is largely due to what Chishty calls the ‘bounceability’ factor. “Investors from
the Middle East and China, in particular, are very resilient,” he says. “They
have seen Pakistan go through difficult times before.” Indeed, Pakistan is a
country created out of political chaos 60 years ago when it split from India.
Since then, it has weathered the assassination of its first prime minister,
Liaqat Ali Khan, in 1951 and fought three wars with India. It has survived the
death of its dictator General Zia ul Haq, whose plane crashed in mysterious
circumstances 20 years ago, as well as at least two assassination attempts on
the current president Pervez Musharraf.

Political murders rarely trigger a country’s collapse. Witness the shootings
of Indian prime minister, Indira Gandhi in 1984. Nor should one ignore the
assassinations of four US presidents, and 14 failed attempts. Life ­ and
business ­ carried on in both countries, as it has in Pakistan.

That is not to imply that all is well in Pakistan. Far from it. The key will
be how long unrest prevails and whether the government can ensure an acceptable
level of fairness in the general election. Much also depends on action taken by
the rating agencies, traditionally allergic to political instability. Standard
& Poor’s has warned that its B+ sovereign rating could be lowered if
Bhutto’s assassination precipitates accelerated violence and political turmoil.
“A prolonged political stalemate or social disorder would make the rating
vulnerable, primarily from an external liquidity and fiscal angle,” says S&
P’s Agost Bernard.

Losing confidence
Moody’s analyst Aninda Mitra believes that Bhutto’s murder could prolong the
damage to investor confidence as well as the level of domestic economic
activity. “Moody’s lowered the outlook on Pakistan’s B1 sovereign bond ratings
to negative after the imposition of the state of emergency, which we viewed as
creating a degree of uncertainty that made stable political outcomes much more
amorphous,” says Mitra. “If the plunge in investor confidence and a
deterioration in the level of macro-economic stability is sustained, then a
downgrade of the bond ratings could follow.”

The loss of prime minister Shaukat Aziz may, in the long-term, prove more
damaging to Pakistan’s economic prospects than the assassination of Bhutto. The
former head of Citibank’s global private banking business, Aziz was plucked by
Musharraf to become finance minister after his 1999 military coup, and was later
elevated to the premiership. He resigned in December after serving eight years
in government. Aziz is credited with having created the country’s economic
turnaround and is the face of Pakistan to international investors.

Musharraf is expected to stay on as president after the election. The former
army chief undoubtedly has one of the world’s toughest jobs, having to appease
an assortment of unenviable constituents, from George Bush to home-grown
Islamist fanatics and a restless army. Musharraf’s most demanding task, however,
may be putting together an economic team capable of restoring investor
confidence in Pakistan.

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