Govt bonds attract $700mln net foreign investment

KARACHI: Foreigners invested a huge $3.81 billion in rupee-denominated bonds, but made panic withdrawals following the coronavirus pandemic, which reduced the net investment to $700 million in Pakistan in the last fiscal year ended June 30, 2020.

Net investments made by foreigners in treasury bills in July-June FY2020 stood at $625 million, the central bank’s data showed. However, they have been buyers of $3.692 billion t-bills in the period under review. The selloff in treasury bills in FY20 was nearly $3.067 billion.

Foreign net investment in Pakistan Investment Bonds in FY20 stood at $75 million. Investment in PIBs in FY20 amounted to $120 million. Outflow from PIBs in FY20 stood around $45 million.

The foreign selling in fixed income markets started (outflow of government securities) in March 2020 as coronavirus-related uncertainty in the financial markets hit global investor sentiment and diverted investors towards safe haven assets from making investments in emerging markets.

Moreover, monetary easing by the State Bank of Pakistan and depreciation in the exchange rate also compelled foreign investors to divest such investments.

Since the start of FY2020, foreign fund managers invested in T-bills and PIBs not only to chase risk-adjusted returns offered by Pakistan on government securities, but also in response to the sharp improvement in the balance of payments, the reserves buffers, and particularly reforms initiated in the exchange rate market.

Previously, foreign portfolio investors were wary about the sustainability of the country’s exchange rate system. However, investors’ concerns were addressed after the SBP adopted a market-based exchange rate regime in May 2019. Moreover, the country’s creditworthiness had improved with the initiation of the IMF’s EFF programme and the successful conclusion of its first review in November 2019.

The appetite for Pakistan’s domestic debt increased since the central bank sharply hiked interest rates, which resulted in unprecedented rise in treasury bills’ and bonds’ yields. The inflows into the debt securities also supported the central bank to build-up its foreign currency reserves.