Global investors bet big on economy

IMF loan spurs increased investment in Eurobonds, T-Bills

KARACHI:

Global investors are increasingly betting on Pakistan's external and internal economy, boosting their stakes in the government's US dollar-denominated Eurobonds in the global market and rupee-based treasury bills (T-bills) in the local market. This trend began around the time the country secured the International Monetary Fund's $7 billion loan programme in late September 2024.

The price of Pakistan's global sovereign bonds has surged, accompanied by a significant drop in their yields (rate of return or six-monthly interest payments), as yields and prices move in opposite directions.

Topline Securities CEO Muhammad Sohail reported, "Remarkably, Pakistan's dollar-denominated Eurobonds, which were yielding around 20-40% this time last year, are now near single digits at 9-11%."

"The sharp decline in yields could pave the way for the government to access commercial borrowing from international markets on more favourable terms," he added.

Speaking to The Express Tribune, AKD Securities Director of Research Muhammad Awais Ashraf confirmed that global investors are buying Pakistan's Eurobonds at rising prices, and their demand for higher yields on the bonds has significantly decreased.

The IMF's Extended Fund Facility (EFF) of $7 billion, which spans 37 months, has boosted investor confidence. Investors believe the nation has secured the required external financing under the programme, making Eurobonds an attractive asset for better prices and returns going forward.

Data shows that the price of Pakistan's 10-year Eurobond of $500 million, maturing in September 2025, rose to 98.2 cents on the dollar as of October 4 (Friday), compared to 97.1 cents on September 6, before the IMF programme. The bond's yield has dropped by 8.06 percentage points since January 1, 2024, to 10.26% as of Friday. Similarly, the price of the 5-year bond of $1.3 billion, maturing in April 2026, surged to 93 cents on Friday, up from 91.6 cents on September 6. Its yield dropped by 11.74 percentage points since the start of the year to 11.18% over the weekend.

Other bonds show similar trends. There are currently seven Pakistani Eurobonds in circulation with a cumulative value of $6.8 billion, set to mature between September 2025 and April 2051.

Ashraf added that the persistent rise in Pakistan's foreign exchange reserves, now at a 30-month high of $10.7 billion compared to slightly over $9 billion two and a half months ago, and the return of a current account surplus in August, have further improved foreign investor confidence in the domestic economy.

Foreign investment in T-Bills

Foreign investors injected $61.65 million net into rupee-denominated T-bills in local markets during September 2024, bringing total global investment in T-bills to $179.16 million in the first three months (July-September) of the current fiscal year 2024-25, according to the State Bank of Pakistan's data. Ashraf attributed this interest to the stability in the rupee-dollar exchange rate and the significantly higher returns on local bonds compared to those in developed countries.

The rupee-dollar exchange rate has remained stable at around Rs277-279/$ for the past six-and-a-half months and has strengthened since the IMF programme's implementation. Additionally, T-bills offer a return of around 16%, compared to 5.5-6% in developed countries, making them attractive to global investors.

Pakistan's high rate of return has persisted despite the central bank cutting its policy rate by 4.5 percentage points since June 2024, bringing it to 17.5%.

Only three banks fit the

ADR criteria

The IMF programme and high-interest rates have increased government financing availability. Consequently, the government has repaid a portion of its domestic debt to local banks ahead of schedule, increasing the banks' liquidity.

Many banks in Pakistan are now striving to meet the Gross Advances to Deposit Ratio (ADR) target of 50% by December 2024 to avoid an additional tax of up to 16%.

As of June 30, 2024, only three out of 19 listed banks—Samba Bank (SBL), Faysal Bank (FABL), and Askari Bank (AKBL)—have a gross ADR above 50%.

Topline Securities Analyst Sunny Kumar stated that to avoid the tax, "a few banks have recently started lending at rates as low as 4% (KIBOR minus 12%)."

In a recent transaction, the Trading Corporation of Pakistan (TCP) secured Rs360 billion in financing from banks at KIBOR (benchmark lending rate) minus 11.9%. With KIBOR around 16% at that time, TCP effectively raised financing at a 4% interest rate.

In a recent corporate briefing, banks expressed confidence in meeting the 50% ADR target by December 2024. However, according to channel checks, many banks will aim to cross the 40% ADR mark to reduce the additional taxation to 10% instead of 16%.