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Pakistan Risk Surges as $50 Billion Debt Bill Coming Due

Faseeh Mangi  and Divya Patil

(February 15, 2016)

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 last 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 percent of Pakistan’s outstanding debt is due to mature in 2016 — roughly $50 billion, equivalent to the size of Slovenia’s economy. The bulk of that is in local currency.

Prime Minister Nawaz Sharif has worked to make Pakistan more investor-friendly since winning a $6.6 billion International Monetary Fund loan in 2013 to avert an external payments crisis. The economy is forecast to grow 4.5 percent, 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 Ltd., said by e-mail.

Right now, he said, there’s not much reason to panic. 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, Tang said.

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

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