International investors pile into Pakistan: German Media. The sovereign bonds of Pakistan were never a highly valued commodity, but in November, global investors pumped $642.5 million into local currency bonds. The question is how long is it going to last?
The local debt market in Pakistan has seldom been a venue even for the least risk-averse investors to venture. But the sovereign bonds of the Asian country are seeing unprecedented foreign money inflows, with global investors buying up bonds worth 642 million dollars (580 million dollars) in November alone. By the end of the fiscal year, this is expected to reach a record $3 billion.
According to the financial adviser to the prime minister, Abdul Hafeez Shaikh, foreign direct investment rose by 200 percent in the first half of 2019, while stocks also rose. Over the past month, the main Karachi stock index has risen by 13 percent, making it Bloomberg’s best-performing stock exchange of 94.
As part of efforts to rein in inflation and show its willingness to reform public finances as a precursor to IMF support, the central bank doubled the main benchmark interest rate to 13.25% this year, which is now the highest in Asia.
But this year’s rupee is down nearly 50% against the dollar and is one of the worst-performing currencies in the world. This was followed by the central bank making the existing managed-float system more flexible.
Nonetheless, the lower effective real exchange rate means that investors will receive even higher returns on local currency bonds. And maybe that’s the rub.
“Good value trade in itself is a double-digit yield on a cheap currency,” said Charles Robertson of Renaissance Capital to DW.
“I would recommend that investors continue to buy Pakistan while it offers double-digit interest rates,” he added. Even a few percent cuts in the central bank rate would still make Pakistan interesting, Roberston continued.
“Pakistan’s current policy options give the nation the best chance to embark on a sustainable growth path. Borrowing costs are lower as foreign investors buy government debt.”
Of the1-year papers purchased in November, 55% came from the United Kingdom and 44% from the United States, central bank data showed.
Pakistan also said it will issue $1 billion of so-called “panda bonds” on the Chinese market for the first time in yuan in the first quarter of 2020, said Habib Bank CEO, Muhammad Aurangzeb. A Panda bond is a non-Chinese issuer Chinese renminbi-denominated bond sold in China.
This quick cash comes with one or two caveats, though normally. The higher the return, the higher the risk.
Buttressed by support from the International Monetary Fund (IMF), earlier this year the government embarked on a plan that has become familiar to many developing nations that agree to the terms of the IMF in return for assistance: cuts in government spending, “restoration” of fiscal discipline, “incentivization” of exports, and cuts in the current account deficit.
In the fiscal year that began in July, the government also agreed to raise revenue by more than 40 percent, a goal that many believe is unrealistic.
Reducing subsidies for electricity, another condition of the loan threatens to ignite further oppositional irritation.
The IMF plan is targeted at higher foreign reserves and has received external funding from partners including the Asian Development Bank and the World Bank.
Solidarity with students organized in Lahore in November by left-wing student organizations and parties
Moody’s rating agency raised the credit outlook for Pakistan from negative to stable on Monday. “The rating affirmation reflects the relatively large economy and strong long-term growth prospects of Pakistan, coupled with ongoing institutional reforms that increase political legitimacy and effectiveness, although from a low starting point,” Moodys said.
The agency said it was forecasting a narrowing of Pakistan’s current account deficit in this and next fiscal year (end in June), hovering about 2.2 percent of GDP, from about 5 percent in 2019.
Earlier this year, the troubled prime minister, Imran Khan, backed a Chinese loan to help ease the economic challenges of the country, conscious that the terms of the IMF will be difficult to satisfy politically and also as a way to get Beijing on board in its continuing conflict with India in Kashmir.
Many assume that the 1-year bond represents the anticipated survival of the unstable government of Imran.
There are concerns that this is hot money that could dry up if rates are cut by the central bank, although this is not expected to be the earliest until July 2020.
“Clearly there is a chance of a social/political backlash against a government that won the election promising higher spending on health and education, and that’s one reason why investors get such a high bond return,” he said.
High-interest rates are also affecting domestic corporations ‘ investment, and Moody’s said the downsides are “structural constraints on economic and export efficiency, low capacity to generate revenue that weakens debt affordability, as well as political and still material external vulnerability threats.” News report on International investors pile into Pakistan: German Media.