Bangkok / Singapore: The ouster of Pakistan president Pervez Musharraf was hailed by the government as a chance to turn around a crumbling economy that has left half the 168 million population short on food. Investors aren’t convinced, and it means more declines for the rupee.
A rally in the Pakistani rupee from its 15 August record low of 76.50 per dollar last week faltered after two days, leaving the currency down 19% this year. The Pakistani rupee is the world’s fourth worst performer, behind the Zimbabwean dollar, Turkmenistan manat and Icelandic krona.
Templeton Asset Management Ltd and Aberdeen Asset Management Plc. said they doubt Pakistan’s new leaders have the resolve to slash outlays or raise borrowing costs to help curb the fastest inflation in 30 years at a time when the economy is slowing.
“Inflation can only be beaten by a cut in government spending, which means turning off the currency printing press,” Mark Mobius, executive chairman of Templeton in Singapore, who has about $200 million (Rs872 crore in India) invested in Pakistan, said.
The cost to protect the nation’s sovereign bonds from default has almost tripled since October to the highest for government debt after Argentina. Foreign exchange reserves have declined by more than half to $6.6 billion, enough to cover just three months of imports, according to Standard and Poor’s (S&P). The United Nations World Food Programme said on 11 June that half the population was at risk of running short of food.
Musharraf, 65, quit on 18 August to avoid impeachment. The former general’s exit spurred the rupee to appreciate to 74.35 per dollar within two days, before ending last week at 76.35.
While the rupee is “undervalued,” Mobius said that high inflation and rising unemployment threaten to spoil the investing environment. Mobius oversees $40 billion in emerging market stocks for Templeton, a unit of California-based Franklin Resources Inc.
Pakistan’s rupee may weaken to 80 “anytime,” said Tim Condon, chief Asia economist at ING Groep NV in Singapore.
“We have been avoiding Pakistan for a while because of the political uncertainty and we will probably continue to do so,” said Goh How Phuang, a Singapore-based portfolio manager at Schroder Investment Management Ltd, which manages about $250 billion in funds globally.
Subsidies to cap food and fuel prices have widened the budget deficit to a 10-year high of 7% of GDP. The government has turned to the central bank to finance the deficit, increasing reserve money, a measure including cash in circulation and bank deposits, by 22% to Pakistani Rs1.47 trillion ($19.3 billion) as of 30 June from a year earlier.
Pakistan’s dilemma is a reminder of the risks to investing in emerging markets. Central banks of Chile and India raised rates even as their economies slowed, to curb price increases. The Chilean peso fell 4% this year, while the Indian rupee slumped 9%.
As inflation accelerates, S&P says fund inflows are no longer enough to cover the current account deficit. The shortfall in the broadest measure of trade expanded to a record $14 billion in the year ended 30 June from $6.9 billion a year earlier.
Loans of as much as $4 billion from the Asian Development Bank and the World Bank may support the currency, causing it to appreciate to 73 by mid-2009, said Sayem Ali, a Karachi-based economist at Standard Chartered Plc.
“If oil prices stabilize at around $110 a barrel, which I think they will, that will actually be good for the Pakistan current account,” said Arjuna Mahendran, head of Asia investment strategy at HSBC Private Bank, which manages $494 billion in assets. He expects the rupee to settle at 76.50 and recommends buying the nation’s debt next year.
Patricia Lui and David Yong in Singapore and Farhan Sharif in Karachi contributed to this story.