The Telegraph
Since 1st March, 1999
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Political risk high: Analysts

Singapore, Nov. 28 (Reuters): Picture this: just when Pakistanís political turmoil seems to be simmering down, a key leader is assassinated, the Karachi stock exchange is bombed and elections are postponed indefinitely.

Analysts say these are the worst-case scenarios that could frighten an international community hitherto sanguine about the latest turbulent events in Pakistan.

ďA couple of things could really shake things up, such as an election in which there is significant violence or an assassination of one of the key leaders,Ē said Jennifer Harbison, a senior South Asia analyst at Control Risks Group, a private consultancy.

Whoever leads Pakistan will after all have a finger on the trigger of a nuclear arsenal aimed at India.

But economists and analysts say investors used to Pakistanís power struggles and distracted by the US subprime crisis remain largely unconcerned. Those involved in Pakistan are already primed for risks. Others see positive signs emerging.

Pervez Musharraf, who declared a state of emergency this month, has given up his army post and will this week become a civilian President, which will satisfy some critics at home and abroad.

The country also appears on course for parliamentary elections on January 8, the economy is growing strongly and foreign companies are still signing deals to invest in power and energy projects.

International investors do deem Pakistan riskier now than anytime in the past three to four years. Credit default swaps, which measure the cost of insuring Pakistan debt, now price in a 27 per cent probability of default over the next five years. Control Risks Group reckons political risk in Pakistan is still a high 7, on a scale of one to 10.

One big worry for economists is that Pakistanís current account deficit, now nearly 8 per cent of economic output, is funded mainly by foreign capital flows ó money from the sale of state firms and aid from the US for military spending.

Analysts Sanjay Mathur and Scott Wilson of the Royal Bank of Scotland say an external financing deficit could force a 10 to 15 per cent devaluation of the Pakistan rupee.

That would definitely reverberate in other emerging markets, even if it has limited impact.

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