Just a week after Fitch upgraded Pakistan’s credit rating to CCC+ and S&P Global affirmed its existing rating at CCC+, the country again caught the attention of global investors with its financial rally. That, coupled with the rollover assurances to the tune of $12 billion from friendly nations, has renewed hopes of a sustainable economic turnaround in the country.
According to latest reports, investors who bought Pakistani bonds denominated in US dollars – also known as ‘dollar bonds’ – have received a 30 percent return. Pakistan’s dollar bonds have performed the best in terms of returns as compared to other Asian countries, and Bloomberg said this was all because of the anticipation of a new three-year lending package worth $7 billion from the International Monetary Fund (IMF). It reported Pakistan’s dollar bonds being traded at around 77 cents on the dollar for the 2031 bond and 72 cents for the 2051 bond.
Investors, including major players like Eastspring Investments, are buying on the dip, hoping for further gains as Pakistan secures more financial backing.
The excitement is there, but investors said the country would have to adhere to the economic reforms mandated by the IMF in order to extend the gains in the bond market.
The upcoming IMF package is expected to be finalized by the end of this month or early September, but before that Pakistan needs to secure long-term financing assurances from its bilateral creditors. If done so, its dollar bonds may rise to 85-90 cents on the dollar from their current mid-70 cents, but that would require a risk-on market environment.
Investors believe Pakistan’s bonds will not just recover in the short term but also continue to deliver handsome returns. More debt might be issued in the form of Eurobonds, but the country is reportedly waiting for its credit ratings to improve further so that the bonds could be deemed safer and more attractive.
On the other hand, there are talks of launching a China-style Panda bond, and a consultant has already been hired for this purpose. Moreover, the country is seeking an extension of repayment tenure for Chinese independent power producers (IPPs) for three to five years, totaling $9 billion. Other than that, international commercial banks are also reportedly interested in lending to Pakistan, but they are waiting for an approval from the IMF on the bailout package.
Separately, Finance Minister Muhammad Aurangzeb has announced that Saudi Arabia, China and the United Arab Emirates will be rolling over $12 billion in deposits for three to five years. According to reports, these countries will renew their deposits every year, providing a stable source of funding for Pakistan. This rollover assurance, which will act as a safety net for tough times, has increased Pakistan’s chances of getting the loan package that was agreed upon last month.
The international lender had earlier asked Pakistan to provide debt profiling, which includes $12 billion in debt from friendly countries – $5 billion from Saudi Arabia, $4 billion from China and $3 billion from the UAE. With the latest development, Pakistan now has more financial breathing space to make decisions and implement the economic reforms.
The rollover will also help considerably increase the country’s foreign exchange reserves, subsequently stabilizing the rupee and reducing the risk of debt default. If the country manages to successfully implement the reforms and secure international support, it would lead to a more stable economic environment; hence more foreign direct investment and less dependence on foreign aid. However, any missteps would derail the progress made so far. The path ahead is challenging but full of potential, and investors will continue to monitor Pakistan’s progress closely.