Bonds rise on economic optimism

Become world’s best-performing driven by high hopes ahead of new govt

KARACHI:

Pakistan’s US dollar-denominated Eurobonds and Sukuks have emerged as some of the world’s best-performing bonds in global markets, driven by optimism surrounding the nation’s domestic macroeconomics amidst the ongoing elections to elect new political governments at the centre and in the provinces on Thursday.

The robust rally in these bonds indicates a restoration of foreign investors’ confidence in Pakistan and its future government, which is widely anticipated to unveil a new economic roadmap aimed at addressing the nation’s current economic and financing crises, particularly enhancing its capacity to make foreign debt repayments on time.

Arif Habib Limited (AHL) reported that the price of Pakistan’s 10-year Eurobond, valued at $1 billion and maturing in three months on April 15, 2024, surged to a record high of 98.11 cents on February 7, 2024. The bond, which had traded below 50 cents in June 2023, almost halving its face value of $1, has now rebounded significantly, reaching an exit price of 98.11 cents, it was learnt.

Currently, global traders have invested approximately $7.80 billion in Pakistan’s foreign Eurobonds and Sukuks, with maturity dates ranging from April 2024 to April 2051.

The price of Pakistan’s upcoming 10-year Eurobond, valued at $500 million and maturing on September 30, 2025, rose to 87.81 cents from around 40 cents in June.

Speaking to The Express Tribune, Tahir Abbas, Head of Research at AHL, commented, “The Eurobond price has doubled in the past seven months, emerging as one of the best-performing bonds in global markets.”

The surge in Eurobonds, especially those maturing in April, is attributed to three key factors: the ongoing general elections, anticipation of the new government securing a new International Monetary Fund (IMF) loan programme after the current $3 billion programme concludes in March 2024, and expectations of the central bank cutting its benchmark policy rate by around 7 percentage points to 15% by the end of December 2024, he said.

These developments are expected to create a conducive environment for economic growth, industrial revival, and the creation of new job opportunities.

Read Pakistan’s Eurobonds jump to multi-year highs

Abbas noted that bond prices have continued to rise over the past seven months (July to date), with the rebound beginning after the previous government secured the $3 billion IMF loan programme in late June 2023.

Following the completion of the first economic review of the programme in November 2023, the IMF released the second loan tranche of $700 million in January 2024, affirming Pakistan’s compliance with programme conditions.

Abbas highlighted that Pakistan’s foreign exchange reserves have doubled to over $8 billion compared to less than $4 billion in June 2023, enabling the government to smoothly repay $1 billion to Eurobond global investors on April 15, 2024. Despite facing a foreign exchange reserves crisis, the country successfully repaid $1 billion to foreign investors days before the previous Eurobond matured in December 2022.

In a recent development, global credit rating agency S&P Global Ratings hinted at a potential upgrade to Pakistan’s credit rating to ‘B’ once the new government assumes power, subject to its economic policies and reform efforts. Currently rated ‘CCC+’ by the agency, Pakistan’s credit outlook depends on its ability to secure a new IMF loan programme and ensure timely debt repayments, while fostering economic expansion. The agency will in particular be watching the next government’s moves on approaching the IMF and securing a new loan programme, which will ensure that the country continues to repay foreign debt on time and allows gradual expansion of its economic activities throughout this fiscal year (FY24) and beyond.

Abbas highlighted that global investors will closely monitor the new government’s economic measures, particularly its efforts to attract foreign direct investment (FDI) in export-led sectors, expand the taxpayer base, enhance tax revenue collection, and create fiscal space for economic activities.

Published in The Express Tribune, February 9^th, 2024.

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