Pakistani Stocks Rise on Musharraf's Exit

Pakistan shares surged and its currency nudged up versus the dollar after President Pervez Musharraf announced his resignation, but analysts cautioned that worries over the deteriorating economy will limit near-term market gains.

Mr. Musharraf said he was stepping down in an address to the nation Monday even as he defended his record of economic management and support for democracy.

The move, after nine years in power, came as he faced the threat of impeachment from the ruling coalition, which accused him of corruption.

Pakistan's benchmark KSE-100 index rose 4.5% to 10719.62, but it is still down 32% from its record of 15739.25 on April 21. The U.S. dollar ended the day at 75.30 Pakistan rupees, down from Friday's close of 76.40 rupees.

The rupee, which hit an all-time low of 76.90 to the dollar Friday, is expected to rebound strongly as the resignation removes some of the immediate political uncertainty and should allow the government to focus on the economic challenges that remain, including unstable public finances, lackluster growth, surging inflation and widening trade and current-account deficits.

"Now the focus of coalition partners will be on the economy, and they need immediate remedial measures to improve imbalances," said Muzamil Aslam, an economist at KASB Securities.

Pakistan's economy has been slammed by a collapse in foreign direct investment and hefty equity outflows, with investors spooked by slumping foreign-exchange reserves because of costly fuel and food subsidies and construction projects launched by the new coalition government.

Pakistan's economic growth slowed to 5.8% in the fiscal year ended June 30 from 7.2% a year earlier. The government forecasts economic growth at 5.5% in the current fiscal year. Foreign-exchange reserves -- viewed as a reflection of the strength of a given economy -- now stand at $9.92 billion, their lowest level since 2003.

That is also down from a record $16.39 billion in early November, in large part because the government has been borrowing heavily from the central bank to pay its bills.

The government has pledged to phase out fuel subsidies by December, but recent cuts have already sent inflation to a multidecade high of 24% year-to-year in July, up from 22% in June, which has further eroded confidence.

Many international investors, who have been deserting the country in droves on political and economic worries, fear the absence of a common foe will lead to fighting within the ruling coalition.

Both of the leading parties in the coalition are likely to push, however, to curb presidential powers, which could lead to a delay in selecting a successor for Mr. Musharraf.

That person, market participants say, could well be someone who is less supportive than Mr. Musharraf, a U.S. ally, in the fight against terrorism.

Credit-default swaps, a measure of perceived risk, rose to 7.25 to nine percentage points for five-year protection on Pakistan's sovereign credit. Before Mr. Musharraf's resignation, they stood at seven percentage points on the bid side and were at siix percentage points Friday.

Ratings companies aren't rushing to give the thumbs-up, either, after cutting ratings in May, citing political uncertainties. Mr. Musharraf's move "may ease investor sentiment a bit, but a lot of the future direction on the credit depends on which policy adjustments will now take effect," said Aninda Mitra, a vice president and senior analyst at Moody's Investors Service Inc.

Moody's rates the country B2 with a stable outlook, while Standard & Poor's ranks Pakistan at single-B with a negative outlook.

Observers say the dollar could now ease to 70 to 75 rupees before year end, assuming Pakistan's government shows it is serious about removing expensive fuel subsidies and halting the slump in foreign-exchange reserves.

Nadeem Naqvi, chief executive officer of Karachi-based brokerage firm International Investment Co., said the dollar's fair value should be at 70 to 71 rupees, indicating the Pakistani currency is trading with a heavy risk premium.

He said the fight over Mr. Musharraf's future had become a significant distraction for the government. "We have become very focused on personalities," he said.

The dollar has gained 24% against the rupee since January, reflecting a sharp deterioration in the economic outlook for Pakistan after several years of relatively stable growth.

Pakistan's current-account deficit, at 9% of gross domestic product in the last fiscal year, has also become a key cause for concern, said Mushtaq Khan, a London-based economist with Citigroup Inc.

He warned Pakistan's troubles may require further rises in the 13% benchmark interest rate to dent import demand and, possibly, funding from friendly countries, including the U.S. and Saudi Arabia.

"In our view, only this will calm the forex market and keep the rupee from losing value too rapidly," he said.