Political turmoil increases Pakistan’s default risk

April 04, 2022 (MLN): Pakistan’s political turmoil increases the default risk while triggering off further losses in the nation’s bonds and currency, Bloomberg reported.

The country’s default risk as measured by five-year credit-default swaps has climbed to the highest since 2013 after nearly doubling last month. The nation’s 5.625%-dollar bonds due in December have already tumbled 5% this year, it noted.

The political upheaval deepened on Sunday when a no-confidence motion against Prime Minister Imran Khan was rejected by the deputy speaker of parliament, ruling it was part of a foreign conspiracy. After the speaker dismissed the no-confidence vote, Imran Khan dissolved assemblies and called an early election.

PM Khan said later on Sunday that his evidence of the conspiracy was accepted by the National Security Committee.

"When the country's highest national security body confirms this, then the [parliamentary] proceedings were irrelevant, the numbers were irrelevant," Imran Khan said.

The Reuters news service noted in a report that U.S. officials on Sunday denied any involvement.

All these developments have led to a constitutional crisis and increased political uncertainty in the country as the constitution of Pakistan states that assemblies cannot be dissolved once a no-confidence move against PM has been moved in the assembly, a research note by Topline research said.

The opposition has also termed it unconstitutional and has filed a petition in Supreme Court (SC) against the issue. SC also took a sou moto notice and a three-bench member started hearing on the case which is anticipated to announce its verdict soon.

This ongoing situation threatens to further destabilize the economy and jeopardize a crucial funding package being negotiated with the International Monetary Fund. Investors are concerned the political struggle will distract the authorities from focusing on the yawning current-account deficit,  a Bloomberg report added.

While raising the same concerns, Moody’s Investors Service viewed the no-confidence motion as credit negative for Pakistan on Monday because it increases significant uncertainty over policy continuity, as well as the government's ability to continue to implement reforms to increase productivity growth and secure external financing, including from the International Monetary Fund (IMF).

“How Pakistan will approach the IMF program from this point on is uncertain, and its participants could be in doubt,” Grace Lim, an analyst at Moody’s Investors Services Inc. in Singapore, wrote in a research note. “Pakistan is encumbered with surging inflation and widening current-account deficits amid rising global commodity prices.”

“A potential change in government may put IMF funding at some risk, but ultimately I think Pakistan will get the funding,” said Carl Wong, head of fixed income at Avenue Asset Management in Hong Kong.

“In the near term, there is a possibility that Pakistan bonds remain weak on elevated worries about emerging-market fund outflows, higher energy and food prices,” Avanti Save, an Asia credit analyst at Barclays Plc in Singapore, wrote in a research note.

Umair Naseer at Topline noted that these developments have created a legal crisis in the short term which will impact the stock market, bonds, and commodities. It is believed that the early resolution of the crisis and supreme court ruling on the matter will be critical for the outlook on markets and the economy.

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