Foreign investment in T-bills rises

Investor confidence grows over high returns, stable rupee-dollar exchange rate

KARACHI:

Amid nationwide hue and cry over spike in electricity prices and taxes-laden budget, foreign investors have continued to boost investment in Pakistan’s rupee-denominated government debt securities. Their confidence is buoyed by expectations that interest rates will remain high and the rupee-dollar exchange rate will stay stable in the short term.

Citing the State Bank of Pakistan’s (SBP) latest update, Topline Research reported foreign investment inflows into treasury bills (T-bills) jumped to $444 million in the previous fiscal year ended June 30, 2024 with the investment hitting a four-year high in May 2024.

Muhammad Sohail, CEO of Topline Securities, commented, “With high interest rate and stable currency, Pakistan has attracted $57 million net dollar inflows into T-bills through Special Convertible Rupee Accounts (SCRA) in the month of June 2024 till 7th.”

“We believe once Pakistan gets the new long-term International Monetary Fund (IMF) deal, chances are high that more of such funds will come to get high-yielding government papers, thereby providing short-term support to FX (foreign exchange) reserves and currency.”

In May 2024, Pakistan attracted $230 million, which is the highest monthly inflow after four years. To recall, in FY20, net T-bill inflows amounted to $612 million, peaking in January 2020 with monthly inflows of $1.4 billion.

It is pertinent to note that foreign investors are taking positions in domestic debt securities after the rate of profit started falling in the developed countries.

Many foreign investors are believed to be borrowing from their respective domestic banks at comparatively lower interest rate (6-7%) and investing in Pakistan’s high return (20%) offering T-bills, thereby pocketing the difference in the rates in the two markets. This strategy has helped maintain the country’s foreign exchange reserves stable at slightly below $9 billion.

Muhammad Awais Ashraf, Director Research at AKD Securities, said the revival of foreign investment in the local sovereign debt securities is the result of consistency in the central bank’s policy.

“The consistency in the SBP’s benchmark policy rate (interest rate) and rupee-dollar exchange rate has won back the foreign investors’ confidence,” he noted.

The central bank held interest rate at a record high of 22% for almost a year (June 2023 to June 2024) and made the first cut in four years of 1.5 percentage points to 20.5% in June 2024.

It is expected to hold the rate at 20.5% in July 2024 after inflation rose to 12.6% in June, compared to a two-and-a-half-month low at 11.8% in May 2024. This would keep the rate of return on T-bills on the higher side (around 20%), encouraging foreign investors to continue to take new positions.

Besides, the rupee-dollar exchange rate has remained stable at Rs278-278.70/$ for the past few months.

Ashraf anticipated the rupee-dollar parity to remain stable at around current levels for up to six months (until December 2024), which would continue to attract foreign investment in T-bills. According to his forecast, the rupee is likely to remain strong on continuation of the policy of controlling imports to maintain current account deficit on the lower side and manage with low foreign exchange reserves.

He did not rule out the investment rising to the previous high level of $3.6 billion in less than two years till March 2020 through the same economic engineering. However, the fast changing social and political landscape carries a risk.

Nationwide protests and calls from political parties to stage a sit-in against the hike in power prices and heavy taxes may disrupt economic indicators along with any delay in securing the next IMF loan programme.

Ashraf projected that Pakistan would secure the IMF loan programme by the end of July, considering the country would fulfill its promises by announcing a new power tariff and giving a plan to control the circular debt.

The ongoing public outcry, however, may delay the implementation of such tariff hikes and could compel the government to soften its stance on higher taxes.