Yields ease on Pakistan’s dollar bonds

KARACHI: Pakistan’s dollar-denominated sovereign bonds continued to post recovery due to easing worries about the prospects of the country’s default and the signs of economic stabilisation.

“Finally, Pakistan US dollar bonds prices are recovering. In the last 20 days yields are down 3-29 percent,” said Mohammed Sohail, CEO at Topline Securities on his official Twitter handle.

The yield on the five-year third Pakistan International Sukuk Company Limited, maturing on December 5, 2022, dropped to 21.79 percent on August 9 from its peak of 50.32 percent on July 19.

The yield on a 10-year Eurobond, maturing on April 15, 2024, fell to 39.90 percent from 49.81 percent. Yield on a 10-year Eurobond, maturing in 2025, fell to 25.35 percent from 33.18 percent.

The prices of shorter and longer-dated bonds’ maturities started to rebound after the International Monetary Fund (IMF) confirmed that Pakistan has fulfilled the preconditions for the seventh and eighth combined reviews of the Extended Fund Facility (EFF).

Global investors’ sentiment improved following the steps taken by the government in an effort to revive the IMF loan programme such as the withdrawal of energy subsidies. Due to the government’s measures, the country averted a Sri Lanka-like situation.

Analysts expect the IMF board to meet in the next few weeks and would approve the release of a $1.2 billion loan tranche under the (EFF).

This IMF programme would provide much-needed support and discipline to Pakistan’s external account as delays in the IMF programme and policy actions had led to increased economic uncertainty and continuous decline in foreign exchange reserves, Topline Securities said in a note.

Falling imports and likely resumption of IMF and other flows would bring much-needed stability to the rupee.

“We now expect PKR to remain in the range of 200-240 in FY2023 where on the average basis we expect PKR to settle around 220 in FY2023 against an average US$ rate of 178 in FY2022,” it said.

The rupee has already started showing improvement as after making a low of 240 against the dollar in the interbank market in July 2022, it has strengthened to Rs222 as of August 10.

Pakistan’s gross financing needs for this fiscal year would likely be lower due to a downward revision in the current account deficit estimates which was now $8.7 billion. Pakistan's total financing needs are estimated at $32.2 billion which stems from debt repayment of $23.5 billion and a reduction in the current account gap, it added. The State Bank of Pakistan’s foreign exchange reserves are likely to reach $11.5 billion by June 2023 compared with $8.4 billion as of July 29.

Tightening of fiscal and monetary policies, falling global commodity prices and the market-driven exchange rate has significantly improved the outlook on the current account deficit.

The improvement in the current account deficit in FY2023 would be led by import compression as imports were expected to clock in at $62 billion in FY2023, compared with $72 billion in the previous year.

Though exports were also anticipated to slow down to $30 billion in FY2023 ($32 billion in FY2022), the trade deficit would likely to contract to $33 billion from $40 billion a year ago.