Dollar bonds’ yields rebound on IMF deal

KARACHI: Yields on Pakistan’s dollar-denominated sovereign bonds rallied on Tuesday as the country managed to dodge a default on its foreign debt repayments following the resumption of the International Monetary Fund bailout package.

The yield on the five-year third Pakistan International Sukuk Company Limited, maturing on December 5, 2022, increased 92 basis points (bps) to 23.91 percent on August 30, according to data from Topline Securities.

However, the yield on a 10-year Eurobond, maturing on April 15, 2024, fell 53 bps to 30.29 percent, on a 10-year Eurobond, maturing in 2025, it fell 48 bps to 22.28 percent.

Global investor sentiment improved after the revival of the IMF programme as Pakistan passed the combined seventh and eighth reviews. This would enable immediate disbursement of $1.1 billion to the country. The IMF has also extended the Extended Fund Facility until June 2023.

Due to the IMF’s loan approval, the country has averted a Sri Lanka-like financial collapse, which analysts dubbed as good news for the flood-hit economy.

Analysts said the IMF deal would help stabilise the dangerously low foreign reserves.

The central bank’s reserves have fallen as low as $7.8 billion —a little more than a month’s import over. This would also support the country’s external current account, they added.

Initial reaction has been positive in the currency market, with the rupee gaining ground against the US currency. However, the stocks fell.

“Investor concerns over flood impacts and politics overshadowed the IMF deal. Though concerns are genuine, we highlight that the macro situation could improve drastically and stocks could perform despite higher interest rates and low earnings visibility in FY2023,” brokerage Ismail Iqbal Securities said in a report.

“The slowdown in the economy will take care of the current account deficit. Considering the situation on the ground, it is quite possible that the current account will hit a surplus or a minimal deficit in August. Foreign aid and possible relaxations on the fiscal front would help in flood rehabilitation,” the brokerage report said.

Inflation remains a challenge, where it has already hit 25 percent, while expected to hit 27.5 percent this month, it added.

IMF has shared key projections along with its press release. These projections have not likely incorporated any impact of floods. The IMF is expected to revisit estimates in the next review, when more information would be available on the flood losses.

The IMF has cut Pakistan’s GDP growth estimate by 1 percent to 3.5 percent. The FY2023 average inflation forecast has been revised up to 19.9 percent vs 7.8 percent earlier.

The current account deficit is now estimated at 2.5 percent of GDP from 3.5 percent earlier, which is likely due to a revision in the GDP base as the IMF used the old base for previous estimates.

The IMF sees SBP reserves to increase to $16.2 billion in FY2023. The budget deficit is estimated at 4.7 percent of GDP, while the primary surplus is at 0.2 percent of GDP, which is the same as the FY2023 budget.