Foreign investors return to Pakistan's debt market amid global health crisis

Help rupee to recover Rs2.37 to 161.12 in inter-bank market

KARACHI: In a surprising move, foreign investors have returned to Pakistan’s debt market in the middle of the global Covid-19 health crisis, partially helping the rupee to recover Rs2.37 to a one-month high at 161.12 against the US dollar in the inter-bank market on Tuesday.

Foreign investors poured over $200 million into Pakistan’s rupee-based three to 12-month treasury bills (T-bills). Now, the net investment in government debt securities has again crossed the $1-billion mark, according to the State Bank of Pakistan (SBP). The renewed interest came from UK-based fund managers, according to central bank data.

Earlier, the investors pulled out $2.69 billion in a short span of five to six weeks as most of them sold premature T-bills and long-term Pakistan Investment Bonds (PIBs) in panic in the aftermath of rapidly spreading coronavirus across the world.

Foreign investors had started injecting funds into Pakistan’s debt market from July 2019 after Islamabad agreed to a tough loan programme worth $6 billion with the International Monetary Fund (IMF) in May 2019. The global financial institution has so far lent around $1.5 billion to the country.

The sudden pullout of a huge investment in a short span of time triggered a new round of rupee depreciation in March and April. The local currency depreciated Rs9.08 or nearly 6% to a record low of Rs167.89 on April 7 with a lockdown in Sindh since March 23.

Experts had anticipated the return of foreign investors to Pakistan’s debt market but only after the world successfully overcame the health crisis.

The prevailing high rate of return of around 9-10% on investment in T-bills encouraged the investors to return to Pakistan compared to almost zero return on investment in bonds of developed countries.

With the latest recovery of Rs2.37, the rupee has recovered a total of Rs6.77 or 4% in the past two weeks.

The rupee partially gained ground against the greenback after the SBP intervened in the inter-bank market, meaning it supplied dollars to ease pressure on the local currency.

IMF Resident Representative Teresa Daban Sanchez advised the central bank the other day to limit interventions in the exchange rate to only disorderly market conditions.

“The rupee strengthened following the central bank reduced the dollar-based cash reserve requirement and special cash reserve requirement by five percentage points to 5% and 10% respectively,” said BMA Capital Executive Director Saad Hashmi.

“The relaxation for commercial banks resulted in an additional supply of around $300-350 million in the inter-bank market with effect from Monday (April 20).”

The rupee also gained due to projection of more reduction in dollar demand in the face of rapidly falling imports, particularly of oil - the price of which collapsed to below zero at -$37 per barrel for May futures contract in the international market on Monday, he said. The rupee had partly depreciated after the central bank aggressively cut the benchmark interest rate by 425 basis points in a span of around one month to a 17-month low at 9%.

“The rate cut reduced profit margins on investment in T-bills and PIBs. Despite this, the rate of return remains attractive compared to that in developed countries,” he added.

The rupee recovered ground against the greenback due to scheduled “higher inflows (of dollars) and lower outflows,” said Alpha Beta Core CEO Khurram Schehzad. The historic drop in international oil prices will save Pakistan billions of dollars as the country relies heavily on imported oil to meet domestic requirement.

Besides, the IMF has approved a new assistance package of $1.38 billion for Pakistan to help support the fight against the coronavirus pandemic, Schehzad said.

The World Bank and the Asian Development Bank (ADB) are also considering extending similar loans to the tune of $1.8 billion. Foreign currency inflows on account of foreign direct investment (FDI) and workers’ remittances remained largely unhurt in first nine months (July-March) of FY20 despite the Covid-19 uncertainty around the globe.

“We cannot rule out further drop in rupee’s value in the backdrop of related developments in the short to medium run,” Hashmi added. 

Published in The Express Tribune, April 22^nd, 2020.

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