London: Pakistan's brief period as a destination for adventurous investors seems over for now, as the killing of opposition leader Benazir Bhutto brings fresh instability to an already volatile nuclear-armed nation.
Hopes now lie in tatters that leading Pakistani politicians can create a bulwark against militant Islam and bring in a stable government allied to the West.
"This is the worst possible scenario for foreign investment. Probably there are many months of volatility ahead and this environment of chaos is perfect for Islamic militants," said Luis Costa, head of emerging debt at Commerzbank in London.
"In the first half of 2007, we saw Pakistani assets outperforming which brought in real money managers," Costa said. "We will probably now see a reversal of this trend."
Part of this is due to President Pervez Musharraf's liberal economic policies and the semblance of stability that his firm military rule brought. Secondly, Pakistan has been lifted by the same tide that buoyed most emerging markets throughout 2006 and 2007.
"So far Musharraf has delivered reasonably well - the stock market has gone up, investment has gone in and the economy has done OK," said Rashna Writer, principal analyst at The Risk Bureau, a consultancy in London.
"The problem for Pakistan is that its [civil] institutions have been weakened to the point of being feeble," she said, referring to the parliament and judiciary.
Pakistan's share and currency markets, closed for three days, have not yet reflected the shift in sentiment. But foreigners have been hedging their exposure to Pakistan, with the cost of buying five-year protection via credit default swaps rising some 100 basis points since Bhutto's assassination.
The yield on Pakistan's 2017 dollar bond is now almost 600 points over US Treasuries, compared to the 250-point premium at which it was issued in May.
Rating agency moves will be key, with Standard & Poor's saying that in case of "a period of heightened political instability, [B+] ratings will be lowered."
The electoral outcome may be anyone's guess but one thing is clear - the new leader's job is an unenviable one.
"The demands that Washington is going to put on the leader are going to cause problems because the leader is not going to be able to satisfy Washington and the domestic audience," The Risk Consultancy's Writer said.
"The militants will make it their goal to highlight those problems and tensions, and make them worse."
One result, maybe not unwelcome to foreign and domestic investors in the near term, is that military or emergency rule is reimposed, giving the army powers to stamp out militant training camps.
