The state of emergency may shake stocks and rattle creditors when markets open for business on Monday, but the economic fallout from President Pervez Musharraf's move is expected to be limited.
Although the economy has grown by an average 7 percent per year over the past four years and foreign investment has hit record highs, brokers at home and analysts abroad said there were no fears of an imminent stock market crash or a loan payment default.
A perception of higher risk may hurt any premium Pakistan could have demanded on deals such as a global depository receipt, worth at least $644 million, for shares in state-run National Bank of Pakistan, expected on sale next month. Other deals include the acquisition of a majority stake in Saudi Pak Bank by a consortium, including Bank Muscat and Japan's Nomura Holdings and a stake in Pakistani cable and telecom operator World Call by Oman Telecommunications. Brokers expect the Karachi Stock Exchange 100-index to fall at the open by as much as 500 points, or about 3.5 percent, short of the 5 percent fall where a mandatory trade suspension rule kicks in.
In the credit market abroad, where the country has floated four Eurobonds, spreads may widen on its credit default swaps by 50 to 100 points, from around 350 basis points, reflecting higher political risk. "Because of the political risk you could see the CDS trade wider. An actual default is not likely because there's not a lot of paper coming due in the near term," said Lehman Brothers, Hong Kong-based analyst Yang-Myung Hong.
US RESPONSE: Beyond the initial response, the market is likely to assess the situation - the strength of street protests by opposition parties, if any, and possible sanctions by the international community - and if the status quo prevails, a rebound is likely.
"In the medium-term, (what's important is) the response from the US with regard to this. If you think about the political implications (of the state of emergency), it's really the status quo," said J.P. Morgan Asia Pacific equity strategist Adrian Mowat. Brokers in Pakistan termed the US response as 'soft'. Washington has pumped about $10 billion into Pakistan in the past five years and views the country as a bulwark in its battle against al Qaeda. "I don't think foreigners are going to get out of the market," said Aqeel Karim Dhedhi, chairman of AKD Group.
Shuja Rizvi, a director at Capital One Equities, said the exposure of foreign investors to Pakistan was small compared with the global opportunity in emerging markets, and that most would simply ignore political developments.
He estimated that the special convertible rupee account that foreigners use for investing in local capital markets stands at less than $1 billion"
At the end of the day investors, both local and foreign, want to see stability and continuity. Unless that is threatened I don't see a great impact on financial markets," said Munir Ladha, chairman of local brokerage firm, Eastern Capital Ltd.