Blindfolded on the long-term

Pakistans exchange rate and the sovereign bond have typically been the leading indicators of a potential regime change.
While there hasn been any negative development on the exchange rate front, the 5-year credit default swaps - a key indicator of sovereign bond risks - on Pakistani bond has widened by some 290 basis points to 844.60 bps during the last week.
But this time the CDS may have jumped for another reason, especially since the government has now won back the support of its earlier-ticked-off coalition partners, while also agreeing to the demands of the PML(N), the countrys biggest opposition party. Besides, the whole saga of vote of no-confidence has also been turned damp squib.
What then explains the jump in CDS? "The real reason is the withdrawal of fuel price hike by the government", says Khurram Shehzad of InvestCap Securities.
Shehzads argument is seconded by the UBS Investment Research that terms the reversal of fuel price hike decision as "an early sign of macro economic policy compromises that could hurt the long term economic outlook and anger the IMF and international donors".
UBS has downgraded Pakistan bonds from buy to hold, citing worsening fundamentals, albeit it said it is still placing Pakistan "on hold", on the back of the countrys forex reserves position which UBS thinks are "still more than enough to cover external debt payment and import needs", according to its latest investment note released on Monday.
Still, the fact that these calls of caution come at a time when Pakistan is in a desperate scramble for cash, the hopes of the planned Eurobond issue this fiscal year appear to be fast turning forlorn.
The government has already deferred the RGST, with PM Gilani arguing that "we will not go forward until consensus is evolved." These and other factors, such as the failure to sell 3-G licences and expenditure overruns, suggest that full year fiscal gap might end touching 7-8 percent, with the government resorting to unbridled note printing.
And if its any consolation, these developments coincide with the re-slapping of the terrorist label by the Foreign Policy magazine. According to a recent expert poll by the FP, some 79 percent said they perceived Pakistan as the greatest terrorist threat to the West today.
In short, expect further widening of the CDS. The MQM and the opposition parties may be happy over the petrol price reversal, but Pakistan may have to pay the price come the time of Eurobond selling.