Barclays bullish on Pakistan bonds despite political turmoil

KARACHI: Barclays has maintained its overweight rating on Pakistan's sovereign dollar bonds, saying the new government is unlikely to default on its debt obligations despite political uncertainty and economic challenges, Bloomberg reported on Tuesday.

The British universal bank said in a note that Pakistan's foreign reserves have improved and the repayment risks are low, even as the country faces a daunting task to secure a new loan from the International Monetary Fund (IMF).

"Political noise will likely linger even after national assembly convenes, but repayment risks are unlikely to rise given improved foreign reserves," Avanti Save, a credit strategist at Barclays in Singapore, wrote.

Pakistan's sovereign dollar bonds fell as much as 1.25 cents on Monday, after a close election that resulted in a hung parliament and raised the prospect of a weak coalition government. All bonds fell, but the April 2024 one lost the most to trade at 95.88 cents on the dollar.

Analysts said the market was pricing in a higher risk premium for Pakistan, given the political instability and the economic challenges. The country needs to secure a new IMF deal to avoid a balance of payments crisis, as its current $3 billion Stand-By Arrangement (SBA) expires in March 2024.

Fitch Ratings said on Monday that a new IMF deal is crucial for Pakistan's credit profile and it expects one to be reached within months, but cautioned that "an extended negotiation or failure to secure it would increase external liquidity stress and raise the probability of default".

The rating agency also said continued political instability could delay discussions with the IMF and assistance from other multilateral and bilateral partners, and hamper the implementation of reforms.

Barclays said it does not expect the government to halt payments on its eurobonds, but warned that the bonds could react negatively if the election results are dismissed. "This could delay or slow IMF talks. That said, we do not expect the government to halt payments on its eurobonds," the bank said. "The bonds will also react negatively if election results are dismissed, but stabilize if a caretaker government is installed." The bank also said it prefers a Pakistan Muslim League Nawaz-led government over a Pakistan Tehreek-e-Insaf-backed one, as the former would be less disruptive and more focused on economic issues. "For a Sharif-led government, we would expect the initial 12 months after elections to be less disruptive. On the other hand, a PTI-backed government would likely prioritize its political agenda over economic issues, in our view," the bank's strategist said. The bank suggests buying Pakistan's bonds on weakness.