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 that means more declines for the rupee.
A rally in the Pakistani rupee last week faltered after two days and the currency slumped to a record low of 76.675 per dollar today, bringing declines this year to 19.3 per cent. The 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. The risk of failure has prompted investors, stung by a global slump in stocks and debt markets, to shun developing economies from India to Chile that face similar dilemmas.
“Inflation can only be beat 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 invested in Pakistan, said in an interview. “Stop spending. Stop wasting through corruption.”
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 & Poor’s. The United Nations World Food Programme said on June 11 that half the population was at risk of running short of food.
General’s Exit: Musharraf, 65, quit Aug. 18 to avoid impeachment charges that he illegally toppled former Prime Minister Nawaz Sharif, 58, in a 1999 coup and violated the constitution when he fired 60 judges in November. The former general’s exit spurred the rupee to appreciate to 74.35 per dollar within two days.
While the rupee is “undervalued”, Mobius said that high inflation and rising unemployment threaten to spoil the environment for investing. Mobius oversees about $40 billion in emerging-market stocks for Templeton, a unit of San Mateo, 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. Win Thin, a senior currency strategist at Brown Brothers Harriman & Co in New York, said it may drop beyond 80 as Musharraf’s resignation “leaves a power vacuum”.
