South Asia’s draining debt trap trials
Amid the hype over MSCI’s minimal Chinese “A” share core index entry, with inflows expected to lift performance, Pakistan’s simultaneous return from the frontier tier is a cautionary tale as its component has barely budged this year with US$80 million in foreign investor outflows the day of the switch. As with the mainland, only a handful of stocks were upgraded, and half the Pakistan group was banks like Habib, which have long been stuck trading at book value given capital and bad loan constraints cited in the IMF’s latest post-program review. The Fund also warned about increased debt to Beijing under the One Belt, One Road (OBOR) infrastructure initiative, which has likewise ensnared neighbors Bangladesh and Sri Lanka and stymied their MSCI index gains, at 2% and 7%, respectively, through May. Pakistan recently took out another $1 billion Chinese loan to repay a Eurobond; Sri Lanka will soon relinquish majority Habantota port ownership to cover a $1 billion line; and Bangladesh recently signed $25 billion in projects critics claim is a “trap” since bilateral commercial credit will be prominent.
Pakistan’s GDP growth was almost 5.5% in the first quarter, a decade high, and the IMF and World Bank predict 6% medium-term expansion with the $45 billion Joint Economic Corridor with China (CPEC), although the loan-investment mix will affect the odds. Already the current account deficit has widened to 3% of output on capital goods and energy imports, and official reserves declined toward $15 billion as the central bank tries to keep the currency stable. Government debt has spiked above 65% of GDP, and the 4% budget deficit target will be breached despite a fiscal responsibility law. Inflation was up to 5% in April, with the benchmark interest rate and adoption of a targeting regime on hold. Tax collection, which was a key pillar of the Fund arrangement, has lost momentum as defense spending is due to rise 7% on India tensions. Prime Minister Nawaz Sharif has promised further outlays to again bridge an 8,000-megawatt power gap ahead of 2018 elections and has struck gas deals with Azerbaijan and Qatar. Islamic bank assets were up 15% the last quarter, mainly to electricity and textile company borrowers, as both fiscal and monetary policies remain loose alongside CPEC.
The political opposition, preparing its platform for next year, has started to campaign against alleged “re-colonization” and urged a turn to Russia and Eurasia to diversify existing alliances
Finance Minister Ishaq Dar calculates that one-fifth of the new budget is for CPEC-related purposes, as the Fund repeated reservations about the thin tax net and slow pace of state enterprise privatization. A $1 billion Chinese loan was rolled over in June amid a Tariff Commission ruling that the mainland was “dumping” steel, which may now be revisited under diplomatic pressure. The political opposition, preparing its platform for next year, has started to campaign against alleged “re-colonization” and urged a turn to Russia and Eurasia to diversify existing alliances.
Sri Lanka is coming off bad flooding that will hurt agriculture and drop GDP growth to 4%, as foreign inflows into local debt and equity remain positive since March. The second review of its IMF program was completed after a new revenue act was sent to parliament to aid fiscal consolidation. Inflation is over 8%, and the central bank hiked the benchmark rate to almost 9% in an effort to slow 20% annual credit growth, with banks still saddled with dud assets from the previous “pawning-transaction” frenzy. Fitch Ratings has a negative outlook for the sector, given high exposure to “susceptible” retail and small business customers. Uneven tourism, remittance and export earnings through the first half have contributed to reserves falling to a 7-year low of $5 billion, good for just three months’ imports. The currency has depreciated 5% against the dollar the past year, as officials look to forge additional free trade partnerships on the subcontinent and beyond, with one now under negotiation with Singapore. A Chinese pact will come under OBOR, which has restarted Colombo’s historic $1.5 billion seaside reclamation scheme after the Wickremesinghe administration suspended it on taking control. Of Sri Lanka’s estimated $65 billion debt, around 15% is owed to Beijing, and following a recent meeting of the Sino-Bangladesh Joint Economic Council, Prime Minister Sheikh Hasina’s Nationalist Party opponents have accused her of the same risky strategy. She pledges to raise per-capita income tenfold by mid-century, but the stock market, when not bothered about Islamic fundamentalist influence and slipping remittances, worries about funding immediate project ambitions.