Monday January 30, 2023

Pakistan international bond yields spike on doubts over quick breakthrough in IMF talks

May 22, 2022

KARACHI: Pakistan’s sovereign bond yields have increased sharply owing to growing doubts on the country’s capacity to cope with external obligations with its dollar reserves spent down to bare bones.

“Since December 2021, Pakistan's International Bond yields have spiked significantly. Moreover, with dwindling reserves, one major concern is repayment of a bond worth $1 billion maturing in July 2022, followed by another bond maturing in December 2022 worth $1 billion,” brokerage Arif Habib Limited said in a tweet.

The yield on five-year third Pakistan International Sukuk Company Limited maturing on December 5, 2022 rose to 26.32 percent as of May 20, 2022 from 3.15 percent on December 31, 2021, it said.

The yield on a 10-year Eurobond maturing on April 15, 2024 increased to 25.17 percent from 5.13 percent, it added.

The government is negotiating with the IMF to resume a $6 billion stalled loan programme as the foreign exchange reserves continue bleeding, intensifying balance of payments woes.

The foreign currency reserves of the central bank declined to $10.2 billion during the week ending May 13 —enough to cover less than two months of imports.

However, the new coalition government is still indecisive about rolling back energy subsidies that can be a major hurdle in the completion of the successful negotiations with the IMF.

The government has limited financing options so it will have to control development spending, increase levies and taxes on fuel, and adjust electricity and gas tariffs. The government also needs to withdraw tax concessions and increase income taxes. These adjustments will help revive the IMF bailout, which will unlock financing from other bilateral, multilateral and commercial lenders.

The uncertainty about the resumption of the IMF bailout amid delay in removing fuel and power subsidies and growing political upheaval is fueling fears of the country’s sovereign ratings being downgraded.

“The bond yields are going up as Pakistan is out of the IMF programme. Without the IMF programme, there’s no visibility of how Pakistan would meet its external obligations,” said Samiullah Tariq, the head of research at Pak-Kuwait Investment Company.

“With the re-entry into the IMF programme, this would improve. Some impact is also due to increase in international/global interest rates,” Tariq added.

The current account deficit narrowed 39 percent to $623 million in April. However, it widened sharply to $13.8 billion in 10 months of this fiscal year. Pakistan’s foreign debt and liabilities (outstanding) increased by 5.41 percent to $128.920 billion in the nine months of this fiscal year. The servicing of external debt rose to $4.875 billion the third quarter of FY2022 from $4.357 billion three months ago.

Some analysts expect the current account gap to be $3.6 billion in the fourth quarter of FY2022. The external debt repayments in April-June FY2022 stand at $4.9 billion. The gross financing requirement for the last quarter of FY2022 is around $8.3-8.5 billion, while the SBP’s foreign exchange reserves barely cover these up.