Bloomberg : Pakistan Stocks Drop, Bond Risk Rises After Blasts

Pakistan Stocks Drop, Bond Risk Rises After Blasts

By Farhan Sharif and Denise Kee | October 19, 2007

Pakistan stocks fell from a record and the risk of owning government debt rose after blasts in Karachi killed at least 136 people and disrupted President Pervez Musharraf's bid to form a political alliance.

The Karachi Stock Exchange 100 Index fell as much as 1.4 percent after suicide attacks targeted the convoy of former Prime Minister Benazir Bhutto, who returned from exile. Credit- default swaps on Pakistan's debt rose 25 basis points to 300 basis points, according to ABN Amro Holding NV. Each basis point on a contract protecting $10 million of debt from default for five years adds $1,000 to the annual cost.

Stocks had rallied and default protection costs declined in the past two months on speculation a power-sharing agreement between Bhutto and Musharraf would let the government focus on spurring economic growth. The president's policies helped the $146 billion economy expand at an average of 7.5 percent in the past four years.

"We were hoping that the re-election of Musharraf and the alliance with Bhutto would bring some stability," said Ting Wee Ming, who helps manage $2 billion of global emerging market debt at Pictet & Cie in Singapore. "It looks like political uncertainty might drag on for a while. We are underweight Pakistan bonds and unlikely to buy more for the time being."

The benchmark KSE100 Index, which had climbed 47 percent this year, fell 13.25 to 14,741.97, after earlier falling as much as 201.68, or 1.4 percent.

Economic Prospects

Musharraf, 64, won Pakistan's presidential election on Oct. 6. The country's foreign-exchange reserves have climbed to more than $16 billion from less than $1 billion when he took over and the stock exchange index has jumped 13-fold.

Continued violence may further deter international investors, who have already retreated from the South Asian nation, selling a net $146.3 million of Pakistani stocks in July-August, compared with the sale of shares valued at $1.1 million a year earlier, according to central bank data. U.S. investors sold $53.4 million worth of stocks during the period.

"If I had a short-term horizon, I wouldn't go into Pakistan stocks at all because of the political risks involved," Adrian Lim, who helps manage about $50 billion at Aberdeen Asset Management Asia Ltd., said in an interview in Singapore. "You need a long-term horizon when it comes to investing in Pakistan, because you're going to get this sort of news every few months."

Assassination Threat

Islamic militants had threatened to assassinate Bhutto on her return to Pakistan, where she plans to lead her party in elections due by Jan. 15. No one claimed responsibility for the attack. Bhutto was unhurt.

"Politics could continue to be the wild card," said Tim Condon, head of Asia research at ING Groep NV in Singapore. "Pakistan is one of the strongest economic stories in the emerging-market universe. Politics is a negative, however."

At least 500 people were injured and "the death toll is sure to rise," Rizwan Edhi, who runs the Edhi Foundation ambulance service, said by telephone.

Bhutto, 54, who leads the second biggest opposition party in Pakistan's 342-member parliament, had lived in Dubai and London since 1999 to avoid corruption cases. Bhutto plans to lead her Pakistan People's Party in the national elections.

Pakistan has been compensating investors with higher risk premiums to hold its bonds than other developing nations of similar ratings. The country paid more than Uruguay, Philippines and Indonesia when it raised $750 million selling bonds in May.

Higher Risk Premiums

Investors demand an additional yield of 334 basis points to hold Pakistan's 6.875 percent bonds maturing June 2017 over U.S. Treasuries of similar maturity, 1 basis point higher than yesterday and the most in a week, according to prices from Merrill Lynch & Co. A basis point is 0.01 percentage point.

Standard & Poor's cut its outlook for Pakistan's credit rating to "stable" from "positive" in July on concern that security is deteriorating. S&P has a B+ foreign-currency rating on the debt, four levels below investment grade. The price of the credit default swaps had dropped about 200 basis points in the last two months.

Credit-default swaps are financial instruments based on bonds or loans that are used to speculate on a company's ability to repay debt. They were conceived to protect bondholders by paying the buyer face value in exchange for the underlying securities should the borrower default.

To contact the reporters on this story: Denise Kee in Singapore at dkee2@bloomberg.net ; Farhan Sharif in Karachi, Pakistan, at fsharif2@bloomberg.net .

Last Updated: October 19, 2007 03:22 EDT