Investors lose appetite for NPCs amid economic instability

KARACHI: Investors are losing appetite for Naya Pakistan Certificates (NPCs) due to a declining confidence in the bonds brought on by an economic and political instability in the country.

A latest data provided by Arif Habib Limited, a local brokerage firm, shows that during the quarter that ended March 31, 2023, investors withdrew $354 million from the conventional and Islamic Naya Pakistan Certificates denominated in local and foreign currencies. The gross inflows into NPCs, on the other hand, were $251 million throughout that period.

At the end of March 2023, there were $555 million in NPCs remained outstanding, while the investors made investments totaling $3.784 billion the said period. As a result of a prevailing economic and political unrest, analysts concluded that investor confidence in Pakistan's bonds was declining, causing NPC outflows outpace the inflows.

After experiencing a shock from withdrawals of investments in domestic bonds, including treasury bills and Pakistan Investment Bonds, the government launched Roshan Digital Account (RDA) in September 2020 to attract foreign investors. The rapid exodus occurred shortly after Covid-19's appearance in March 2020. The country's external accounts were severely impacted, and the global economy was also suffering as a result of the pandemic.

“The USD-based rate of return on NPC in light of Pakistan's heightened credit risk does not seem as attractive because USD-based yields have picked up elsewhere also with the increase in US interest rates,” said Mustafa Mustansir, head of research at Taurus Securities.

“For example US Treasuries now offer yields around 4-5 percent compared to 7-8 percent for NPCs along with significantly low credit risk. In fact US treasuries are considered the benchmark proxy for risk free rates worldwide,” Mustansir added.

Plus overseas investors can also look towards other investment grade sovereign and corporate bonds with similar high yield profiles, according to him. In a nutshell Pakistan's credit risk premium is very high in these circumstances which the 7-8 percent NPC return cannot compensate for adequately at this moment. “Hence, outflows exceed inflows.”

The profit rates on conventional and Islamic NPCs denominated in local and foreign currencies were enhanced by the government in January.

Last week's arrest of former Prime Minister Imran Khan on graft charges led to a deadly violence, increased political unrest, crippled Pakistan's economy, and left the nation on the brink of default.

Pakistan is struggling with a balance of payments crisis and a prolonged delay in the IMF programme. The country’s foreign exchange reserves are so low that they hardly even cover a month's worth of imports.