Dollar bonds bounce back as coalition clears IMF cloud

By Erum Zaidi
February 22, 2024

KARACHI: Pakistan's dollar bonds rose on Wednesday as investors welcomed the formation of a coalition government that could ease political uncertainty and help secure a new loan from the International Monetary Fund (IMF).

This image shows the US dollar banknotes. — AFP/File

The prices of the bonds, which had been under pressure due to an inconclusive election held on Feb. 8, increased by 1-6 percent, according to data from brokerage JS Global.

The 10-year $1 billion Eurobond, which matures in April 2024, gained 1 percent to 98.40 cents on the dollar. The $500 million bond due in September 2025 rose 3 percent to 85.87 cents. The bond maturing in April 2026 climbed 4 percent to 77.55 cents.

The bonds with longer maturities saw the biggest gains, with the 2031 and 2036 bonds rising 5-6 percent to trade at 61.70 cents and 67.21 cents, respectively. The sovereign dollar bonds slid sharply on tuesday in the aftermath of the contentious election.

"After the formation of a coalition government, people are expecting stability in the country, which is reflected in bond prices," said Samiullah Tariq, head of research at Pak-Kuwait Investment Company. Two main opposition parties, the Pakistan Muslim League-Nawaz (PML-N) and the Pakistan Peoples Party (PPP), agreed on Tuesday to form a coalition government. The PML-N's Shahbaz Sharif is likely to become the new prime minister with the support of the coalition partners. The PPP's Asif Ali Zardari, a former president, is expected to be the presidential candidate of the alliance.

"This (the formation of a coalition government) will help restore some confidence. That's why we saw some recovery today in the stock and Pakistan bond market," said Mohammed Sohail, chief executive of Topline Securities.

"However, the new finance minister and his/her team are crucial for talks with the IMF and to manage the economic issues." Pakistan faces a looming balance of payments crisis as its external debt obligations mount. The current IMF loan programme of $3 billion expires next month, and securing a new, larger one is seen as the top priority for the incoming administration.

The country has to repay $1 billion of its bonds in April, which can deplete its reserves, which stood at $8 billion as of Feb. 9, up from a low of $2.9 billion a year ago. Analysts say Pakistan needs to enter another IMF programme to address its low reserves and high external funding needs, which are expected to exceed reserves for atleast the next two fiscal years.

"We estimate Pakistan met less than half of its $18 billion funding plan in the first two quarters of the fiscal year ending June 2024, excluding routine rollovers of bilateral debt," Fitch Ratings said in a note this week.

"Nevertheless, this (the reserves level) is low relative to projected external funding needs, which we expect will continue to exceed reserves for at least the next two fiscal years." For the current fiscal year, Pakistan needs $24.5 billion in external financing, of which most has been repaid or rolled over, according to the central bank.