Investors shun Pakistani bonds amid rising threat of default

Investors are on high alert for Pakistan to follow Sri Lanka into default as the South Asian country grapples with soaring commodity prices and tightening credit conditions.

Pakistan’s foreign bonds due to mature in 2024, 2025 and 2026 are trading firmly in troubled territory, at around 71, 65 and 63 cents on the dollar, respectively, according to Bloomberg data.

The country’s debt has been among the worst performers this year of all emerging market issuance, signaling investor concerns over pressures on the developing economy.

Soaring global energy and food prices since Russia’s invasion of Ukraine in February have fueled inflation and caused Pakistan’s trade deficit to widen, depleting its reserves. With its foreign exchange reserves shrinking to around $9 billion, enough to last another two months, a liquidity crisis is looming.

“Going into the Ukraine crisis, Pakistan was not in a good place to start,” said Gareth Leather, senior economist at Capital Economics. “The explosion in commodity prices led to a rapid deterioration in its current account and an increase in government spending.”

The discount on the country’s bonds remains lower than for other emerging markets. This is due to expectations that an IMF bailout coupled with bilateral financial support could help Pakistan avoid a default this year.

Ghana, which like Pakistan is facing soaring prices and is asking for IMF help, has bonds maturing in 2026 trading at around 68 cents on the dollar. Those from Sri Lanka, which defaulted in May, are trading at around 32 cents.

Even so, in a sign that investors are losing confidence in the Pakistani economy, the rupee has fallen more than 15% against the dollar in the past three months, although it recently hit a low of 240 rupees last week. to trade at around 224 rupees.

The three major credit rating agencies – Fitch, Moody’s and S&P – have all downgraded Pakistan’s outlook to negative in recent weeks. Its credit ratings are deep into non-investment grade, or “junk” territory.

Some market participants have endorsed Pakistani officials’ view that allies including the United States, China and Arab countries will help keep it afloat by offering financial support, judging the country’s economy Regionally too nuclear-weapon state to fail.

The IMF is due to hold a board meeting in late August to discuss approving a $1.2 billion disbursement to Pakistan, “once adequate funding assurances are confirmed”, the week said. the organization’s resident representative in Pakistan, Esther Perez Ruiz.

Murtaza Syed, acting governor of Pakistan’s central bank, told the Financial Times in late July that the country was in talks with countries like China and Saudi Arabia to secure additional funding.

“Pakistan has a combination of support from China and the IMF that is likely to combine unlike, say, Sri Lanka or El Salvador,” said Kevin Daly, portfolio manager of emerging market debt at Abrn. “They don’t have the same level of support as Pakistan.”

While Pakistan has relied on bilateral support in past crises, analysts have said it may falter in its efforts to regain its financial position due to political instability.

“We still have a baseline that Pakistan will get board approval for a staff-level deal so that some of the IMF funding comes through,” said Krisjanis Krustins, director of the IMF. Fitch Asia-Pacific sovereign rating team, adding that this would catalyze further bilateral deals and multilateral government funding.

However, he added: “We have a negative outlook, and that is about the political risk and what that could do for the implementation of the deal.”

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