Tuesday, November 6, 2007

Pakistan

Pakistan has been taking a beating by Moody’s and S&P since emergency rule has been established. Bond holders tend not to like when single military ruler decides he needs to fight the “terrorists” and suspends democratic elections when things don’t go his way. The major issue in this case isn’t even a question of whether or not he government will renegade on it’s bonds, it’s unlikely since they will need to borrow money again sooner or later, but whether or not the economy will be sustainable. Equity investors are not pouring money into projects in the country reducing taxes to the State.

Here is where the debt investors can get play for their dollars. Pakistan, while unstable, is a partner to the United States in their war on terror. The US might not like the current powers that be, but they have to work with him. Being that the country possesses nuclear power, it is hard to imagine the US not intervening before the case gets out of hand.

Pakistan sovereigns might be worth a look right now. Why there is clearly a high political risk embedded in them now, it seems that they are largely oversold. As Bloomberg notes the yields on June 2017 have risen over 250 bps. There is no clear indication that this is indeed the bottom but it seems unlikely that the current government would allow for continual decline in social unrest. General social unrest provides difficulty for the country since they are multi-faceted entities whereas the risk being undertaken by a singular government gone rogue is quantifiable and more easily fixed.

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