Foreign portfolio investors make a comeback after IMF loan

Foreign inflows into PSX and debt market surge 19% or Rs54b

KARACHI:

Short-term foreign portfolio investors have reposed confidence in Pakistan’s economy as they staged a comeback, injecting a modest amount into equity and debt securities after the International Monetary Fund (IMF) awarded a $3 billion loan programme in late June 2023.

The central bank’s latest data suggests that foreign inflows into the Pakistan Stock Exchange (PSX) and the debt market surged 19% or slightly over Rs54 billion ($183 million at the exchange rate of Rs295/$) in the first seven weeks of current fiscal year, totaling around Rs344 billion ($1.16 billion).

In the prior fiscal year, they had emerged as net sellers of securities worth Rs29.53 billion, taking down their outstanding investment by 9.25% to Rs289.75 billion in June 2023.

Foreign investors have remained net sellers at the PSX for the past six years due to political and economic instability.

However, they injected a net $3.6 billion into debt securities like T-bills and Pakistan Investment Bonds (PIBs) in 2019. Later, they aggressively pulled out the investment in subsequent years – 2020 and 2021 – amid the Covid-19 pandemic.

Talking to The Express Tribune, Alpha Beta Core (ABC) CEO Khurram Schehzad said foreign portfolio investors returned to the domestic capital markets in the wake of IMF loan programme and availability of stocks at historically low prices at the PSX.

They have also taken small positions in T-bills and PIBs due to record high rates of return around 23% compared to less than 6% return on such investments in the US debt market.

They may remain net buyers in the domestic capital markets, going forward, but “the volume of investment will remain moderate in the current election year, ie FY24,” Schehzad said.

He said the investment would increase after political stability, which was linked with the holding of elections in the current year. It would pave the way for economic stability and encourage foreign investors to increase their stakes in the local markets.

Foreign investors will increase their investment in the PSX beyond moderate levels only after the rupee-dollar exchange rate achieves stability, interest rate is cut down and political stability is preserved.

Data breakdown suggests that the outstanding foreign investment in the PSX increased to Rs341.22 billion in seven weeks compared to Rs288.75 billion in June 2023.

Such investment in T-bills and PIBs rose to Rs2.77 billion in six weeks compared to Rs1 billion in June 2023.

FDI hits 7-month low

Foreign direct investors are, however, still evaluating the unfolding situation in the country to initiate new long-term projects in different sectors of the economy like the energy and export sectors.

They made seven-month low foreign direct investment (FDI) at $87.7 million in July – the first month of current fiscal year 2024.

Schehzad noted the foreign investors have put their new investment decisions on hold after they were denied sending profits earned in the country to their headquarters in abroad amid foreign exchange reserves crisis in FY23.

FDI is meant for long term investment unlike the short-term natured portfolio investment. The long-term investors require clarity on multiple fronts before initiating years-long new projects.

In addition to political stability, they want enabling investment environment like long-term and consistent economic policies, cut in cost of doing business (low interest rate on bank borrowing), rationalisation of tax rates and stability in rupee-dollar exchange rate, he said.

He also anticipated Pakistan would start doing all this after a new political government is formed in the aftermath of the forthcoming general elections.

The FDI data breakup suggests China remained the single largest investor, pouring in $18 million in the month.

Published in The Express Tribune, August 20^th, 2023.

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