KARACHI: The cost of insuring the government debt of Pakistan from default rose to its highest in five weeks on concern the nation’s worst-ever floods will increase its debt burden. Credit-default swaps on Pakistan government debt rose 129 basis points to 700 basis points as of 12:50 p.m. in Singapore, the highest since July 8, Royal Bank of Scotland Group Plc. and CMA DataVision prices show. The contracts spiked to 51.06 percentage points in October 2008, in the aftermath of the credit crisis and the collapse of Lehman Brothers Holdings Inc. A basis point is 0.01 percentage point.
“There will be a tolerance for a higher fiscal deficit because the floods have caused a lot of damage,” Sanjay Mathur, chief Asia emerging markets economist at Royal Bank of Scotland, said in a phone interview from Singapore. “The more worrying aspect is the impact as far as social instability is concerned, as that’s an explicit part of a country’s credit rating.”
The World Bank Monday pledged $900 million in financial support for Pakistan as the government warned of a new flood wave making its way south and continued monsoon rains. Crop damage is estimated at $1 billion, according to the World Bank, while the United Nations has said as many as 3.5 million children are at risk of water-borne diseases including dysentery.
Pakistan is rated B3, the sixth-highest non-investment grade by Moody’s Investors Service, on par with Belize and Argentina, and six levels below India.
The one-off impact of natural disasters, such as damage to property, typically doesn’t unduly impact a country’s economic output, Mathur said. “But afterwards, there is a loss of income and shortages of goods, and those shocks can have an inflationary effect,” he said.
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