Pakistan’s dollar bonds hit tailspin on default fears

September 24, 2022

KARACHI: Pakistan’s dollar bonds came down to their knees on Friday weighed down by a surge in default fears after the flood-devastated country launched appeals for debt relief, The News has...

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KARACHI: Pakistan’s dollar bonds came down to their knees on Friday weighed down by a surge in default fears after the flood-devastated country launched appeals for debt relief, The News has learnt.

The dollar bond, maturing in December 2022, fell by 12 percent whereas the bonds due in 2024 and 2025 dropped by 15 percent, and 17 percent, respectively.

The yield on 2024 bonds has now risen to 60 percent (up 1,400 basis points on a daily basis), while the rate on 2025 bonds has increased to 40 percent (up 800bps day-on-day).

Prime Minister Shahbaz Sharif’s debt relief appeal to rich nations raised concerns over the possibility of default risks, leading global investors to be highly underweight on the country’s sovereign bonds.

“The decline in dollar bonds shows continued investor concerns on the country's external funding gap despite the signing of the IMF agreement,” said Saad Hashemy, an independent economist.

“As per the latest IMF document, the country's annual external funding gap for FY23 is $31 billion of which current account deficit is $9 billion, while the $21 billion is for external debt servicing. These already large numbers are likely to grow even larger in FY24.”

Pakistan is not likely to default on foreign debts as the damage caused by floods will be bridged with foreign aid and aid has started pouring in, according to Hashemy.

Finance minister Miftah Ismail on his official Twitter handle said the debt relief had been sought from bilateral lenders and not necessarily for restructuring of bonds.

“Given the climate-induced disaster in Pakistan, we are seeking debt relief from bilateral Paris Club creditors. We are neither seeking nor do we need, any relief from commercial banks or Eurobond creditors. We have a $1 billion bond due in December which we will pay on time and the investors,” Ismail said. “We have been servicing all our commercial debt and will continue to do so. Our Eurobond debt is only $8 billion due between now and 2051. That’s not a large burden. A significant portion of our debt is from friendly countries who have said they will re-roll their deposits,” Ismail added.

Pakistan's bonds are losing value as a result of growing worries about its external position and political instability. The nation is dealing with a plethora of problems, including a worsening current account, a growing trade imbalance, currency pressures and central bank interventions, rising cost pressures, and devastation from unprecedented flooding. The government has revised its growth estimate down to 2.3 percent taking into account the damage from the floods.

“Pakistan's financing needs are mostly covered under the IMF Programme and Pakistan may seek debt relief like it did during Covid but it is unlikely to default on the required payments,” said Fahad Rauf, the head of research at Ismail Iqbal Securities.

Interestingly, no major change was witnessed in the credit default swap today. Since it’s a thinly traded market, some selling pressure on dollar bonds could have resulted in a sharp price fall, we believe, explained Umair Naseer, an analyst at Topline Securitas in a note. The government has reiterated its resolve to meet its debt obligations and continue with the reform process that has been initiated. “Hence, we believe the likelihood of Pakistan defaulting on its debt payment is low in the short run,” Naseer added.

The expected multilateral and bilateral flows post-floods are also likely to ease pressure on the foreign exchange reserves of the country. As per reports, the World Bank, Asian Development Bank, Asian Infrastructure Bank, and a few friendly countries have already committed flood-related aid/funding which could be to the tune of $1.5-2 billion, he said.

Pressures on the current account have also started to ease after the government restricted imports with the August current account deficit clocking in at $703 million versus $1.2 billion in the previous month.

“We expect this trend to continue which is likely to support the external account situation. Any upside in international oil prices would remain a key risk,” Naseer said.

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