International Investment Outlook For Pakistan

The political instability has further increased foreign investors’ perceived risk in Pakistan, even as many held back on spending plans as they awaited the outcome of parliamentary elections originally scheduled for January 8 and now postponed following the assassination. A range of concerns already included security and law and order worries, even as the country's economy was growing at a fast pace over the past five years under President Musharraf's liberal economic policies.

Foreign direct investment (FDI) has increased to $3.8 billion from a mere $500 million and according to Pakistan’s central bank rose 67% to $1.87 billion in the first half of the 2006-07 fiscal year, led by inflows into the communications, energy, and banking and financial services sectors. During the period, the banking and financial services sector attracted foreign investment of $517 million, followed by the communications sector with $495 million and oil and gas exploration with $315 million.

The strength of economic growth - the government forecasts growth of 7.2% in the year ended June 2008, compared with 7% a year earlier - has outweighed for foreign investors the political risks in the country. The benchmark Karachi Stock Exchange 100 Index has gained for six straight years with a 40% increase in 2007. It was trading at around the 13,590.70 mark on January 2, down from more than 14,814 before the assassination.

Officials claim foreign money has flowed into the country attracted by the availability of skilled manpower and low production costs of production and a level-playing field for both foreign and local investors. Liquid foreign exchange reserves have risen to $22.3 million during the week ended December 22. Total liquid foreign exchange reserves stood at over US$15.6 billion, according to the central bank.

Standard & Poor’s Ratings Services rates Pakistan's sovereign foreign currency B+ with a negative outlook, four notches below investment grade, the same level as Moody’s Investors Service rating of B1 with a negative outlook.

Moody's believes the country's credit rating may hold steady if the country’s economic policy framework does not change, while John Chambers, chairman of S&P’s sovereign rating committee, argues that the sovereign foreign currency will be lowered if the assassination ushers in a period of heightened political instability.

Foreign direct investment and portfolio flows are likely to decline, negatively affecting Pakistan’s external liquidity position, given its large current account deficit of about 4.8% of gross domestic product. The country may encounter increasing difficulty in refinancing its external and domestic debt if lenders’ risk aversion toward Pakistan increases. In addition, fiscal slippages may arise, pushing deficits beyond the government’s target of 4% of GDP, jeopardizing the currently favorable debt trajectory.

Luis Costa, the head of emerging debt at Commerzbank in London, said: "This is the worst possible scenario for foreign investment. In the first half of 2007, we saw Pakistani assets outperforming, which brought in real money managers. We will probably now see a reversal of this trend."

Bhutto’s assassination and concern over increased violence in a country that is a key US ally in its ''war on terror'', combined with weak US economic data, unsettled international markets, which fell on the day following the murder. According to some analysts, the killing and the possibility of a civil war breaking out in the country could raise geopolitical tensions, sustaining the rise in oil prices, which could go above $100 per barrel. US military and defence officials however believe that Pakistan's nuclear weapons remain securely under the control of the Pakistani military.

Source: Asia Times Online

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