With IMF’s lifeline, Eurobonds surge in global market
design: mohsin alam
Taking cue from the International Monetary Fund’s (IMF) lifeline that Pakistan won at the eleventh hour, Pakistan’s Eurobonds in the global market recovered significantly at the weekend, signalling that the risk of debt default has eased in the short to medium term.
Experts project that Pakistan’s capital markets will cheer Friday’s signing of a staff-level agreement (SLA) with the IMF for a $3 billion loan which will be disbursed over nine months.
The Pakistan Stock Exchange (PSX) is projected to stage a handsome rally with gains of 2,000 points (or almost 5%) on Monday next week, the rupee may recover nearly 6% to around Rs270-275 to the US dollar in the short run, the Eurobonds will maintain the uptrend and gold may lose some shine.
The State Bank of Pakistan’s (SBP) foreign exchange reserves may climb up to $8.8 billion by the year’s end, after hitting the low of $2.7 billion in the week ended June 30, 2023, according to treasury firm Tresmark.
Pakistan’s 10-year global bonds worth $1 billion, maturing in April 2024, gained 15.4% to 70.3 cents on a dollar on Friday after the IMF announced the signing of an SLA for a new deal.
The bond price had dropped to almost half around 51.5 cents last week, compared to $1 at the time of its launch, indicating the anxiety among investors.
The prices of seven other global bonds also increased in the range of 6% to 15% on Friday.
Topline Securities CEO Muhammed Sohail anticipated in a tweet that “Pakistan Eurobonds’ rally will continue, especially for the short-duration bond. Pakistan 2024 bond is already up from a low of 38 cents…”
He projected “a rally close to 2,000 points in the (PSX’s benchmark) KSE-100 index when the market opens on Monday.”
Stocks at the PSX were trading at extremely low and unbelievable prices, ie price-to-earnings (PE) ratio of less than three multiples (3x) before Eid holidays. They may stage a rally on the new IMF deal.
“The benchmark index that is hovering in the band of 40,000 to 42,000 points may break this level and go near 44,000 points (over the next couple of days),” he said.
The capital market had been trading at a PE ratio of 7-8x during the good old days. A PE ratio of around 10% is considered healthy.
Arif Habib Limited Head of Research Tahir Abbas projected the other day that the KSE-100 would notch up gains of 20% and reach around 50,000 points in the new fiscal year that started on July 1, 2023.
Tresmark pointed out that keeping in view the past precedents, analysts forecast only a “whimper” at the PSX. However, the market could register a substantial rally as the IMF bailout had not been fully priced in.
It projected that the rupee would most likely strengthen to 275/$. “The next two weeks can be unsettling as the rupee-dollar exchange rate may go to 270-275/$ temporarily.”
This is a good level for importers to settle their obligations. “However, we do not see PKR-USD remain at those levels for more than 15-20 days as the backlog of imports and remittances catch up and with the SBP preferring to mop up forex liquidity to build reserves.”
Experts said that the signing of the new IMF deal would unlock additional financing of $9 billion from donor agencies and friendly countries in flood relief for Pakistan. They had pledged the financing in a Geneva meeting held in January 2023, but awaited the IMF’s nod.
AHL Research said that in the short term it anticipated that the rupee would strengthen, driven by the positive sentiment arising from the new standby agreement.
“However, we expect any recovery to be temporary due to the anticipated opening up of forex markets and the easing of import restrictions, which will exert pressure on the currency.”
Tresmark was of the view that China may continue to roll over its debt while friendly countries may enhance their committed loans of $3 billion to $5 billion and may include more investments and deposits.
Multilaterals including the Islamic Development Bank (IDB), which has already committed $1 billion, the World Bank and others may disburse $3 billion in the next six months.
Almost $2.5 billion out of the pledges of $9 billion may be released over the next 12 months.
There may be a temporary uptick in inflation (due to the IMF’s conditions), but most analysts expect the reading to come down in the coming months.
GDP growth may come under pressure as the government looks to raise the policy rate by another 100 basis points – and it may remain elevated for the next three months, the treasury firm said.
Gold price, however, may retreat in the short run for two reasons. Firstly, the anticipated recovery of the rupee against the greenback will push the bullion price down.
Secondly, the international gold market may remain dull over worries that the global central banks will make a couple of more hikes in their benchmark interest rates to control inflation, according to the background information.
Gold was priced at Rs216,000 per tola (11.66 grams) in Pakistan on Wednesday, significantly lower than the all-time high of Rs240,000 touched a couple of months ago.
Published in The Express Tribune, July 2nd, 2023.
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