Nawaz Sharif disqualified: Pakistan PM’s ouster poses big challenges to the country’s credit profile

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Published: July 29, 2017 12:13:47 PM

The ousting of Pakistan’s prime minister by the country’s top court dramatically raises the risk profile for investors and businesses in the tumultuous, but fast-growing South Asian economy.

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The ousting of Pakistan’s prime minister by the country’s top court dramatically raises the risk profile for investors and businesses in the tumultuous, but fast-growing South Asian economy. The Supreme Court’s disqualification of Nawaz Sharif after a graft probe, prompting his resignation, poses big challenges to the country’s credit profile. As the stock market dipped on Friday, the court’s dramatic move diverted the ruling party’s attention to its survival, instead of the economy. “Political strife constrains Pakistan’s credit profile,” Moody’s Investors Service said in an email to Bloomberg, adding the removal of Sharif will “detract from policy-making in economic and fiscal matters” and reduce “the effectiveness of government policy in general.” Despite the unfolding political chaos, Sharif’s ruling party, the Pakistan Muslim League-Nawaz, is expected to stay in power ahead of an election next year, mainly because of its majority in the lower house of parliament. However, adding to uncertainty, the next premier could be weakened politically by association with Sharif’s family after the court found disparity between their wealth and its known sources of income.

The developments are unlikely to significantly alter nuclear-armed Pakistan’s already-fraught relationship with its arch-rival India. At the same time, it’s not expected to dent ally China’s planned infrastructure investments in Pakistan totaling around $50 billion. Still, investors viewed the removal of Sharif as a near-term negative, which makes Pakistan an even more precarious place to invest.

The “development breeds political uncertainty and only adds to the reasons we haven’t liked the Pakistan story,” said Edwin Gutierrez, the London-based head of emerging-market sovereign debt at Aberdeen Asset Management Plc. “ The deteriorating balance of payments is one of our bigger concerns. There’s already been fiscal slippage” after the end of an International Monetary Fund reform program last year.

The benchmark KSE100 Index plunged as much as 3.6 percent before paring losses, while yields on Pakistan’s dollar bonds rose.

‘Step Backwards’

Sharif’s dismissal — for the third time — can also be seen as a setback for democracy in a country which has been ruled by the military for much of its 70-year history. The armed forces — which is Pakistan’s most powerful and organized institution — has orchestrated coups in the past and controls the country’s foreign policy. General Pervez Musharraf removed Sharif in a 1999 putsch.

Two members of the six member investigation team looking into the Sharif family’s wealth were also drawn from the military’s feared intelligence agencies.

“It’s a step backwards,” said Gareth Price, a senior research fellow at London’s Chatham House. The military “didn’t start it this time, but the effect is exactly the same. The civilian government is weakened vis-à-vis the military.”

The ruling parliamentary party will soon convene to decide on new prime minister, said the former planning minister Ahsan Iqbal at a press conference in Islamabad on Friday, noting that the party intends to serve its full term. The party’s top leadership on Friday endorsed the nomination of Nawaz Sharif’s brother Shehbaz Sharif as the new prime minister, the Dawn reported without saying where it got the information. However, the party needs to nominate an interim prime minister to enable Shehbaz Sharif, who’s also chief minister of the Punjab Province, to contest for a parliament seat, and this interim leader will probably be announced Saturday, according to the report.

Army Supremacy

The army’s supremacy in external relations means the major elements of Pakistan’s foreign policy are unlikely to change, including its low-intensity stand-off with India, which it views an existential threat. It is also likely to continue courting the U.S., which has provided billions of dollars in military aid despite misgivings about Pakistan providing a haven for militants operating in Afghanistan.

“These relationships are effectively controlled by the Pakistan Army,” said Shashank Joshi, a senior policy fellow with London’s Royal United Services Institute. “As the next prime minister is likely to be a politically weaker figure than Sharif, this will give the army even more latitude in these areas.”

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