Yields on international bonds and Pakistan Sukuk have soared in global markets, indicating that the risk of default on international payments has increased following tighter monetary policy and economic slowdown around the world.
The yield climbed 778 basis points to a five-week high of almost 40% on the $1 billion Third Pakistan International Sukuk Co Ltd. The five-year Sukuk matures on December 5, 2022.
The yield on the Sukuk had fallen to around 18% on the day the International Monetary Fund (IMF) board restarted the $6.5 billion loan program for Pakistan on August 29, 2022.
Previously, it had reached 50% in mid-July 2022 due to the delay in resuming the lending program, national brokerages reported.
Similarly, the yield rose 119 basis points on Pakistan’s 10-year government international bond worth $1 billion, maturing on April 15, 2024.
Yields on other global bonds and sukuk – Shariah-compliant bonds – rose in a range of 1 to 63 basis points, from 19% to 29%. The 5 to 30 year bonds mature between September 2025 and April 2051.
Speaking on the state of Pakistan’s economy last week, Finance Minister Miftah Ismail said “the world thinks Pakistan will default…I will not let Pakistan default until I am a minister. finances”.
Ismail Iqbal Securities, head of research, Fahad Rauf, noted that bond yields have been rising in recent days due to an interest rate hike by global central banks.
“Tightening of monetary policy by global central banks is likely to push investors out of emerging markets (developing countries), including Pakistan, and reduce their ability to make international payments (payments to importation and repayment of foreign debt).”
Arif Habib Limited, head of research, Tahir Abbas, said yields rose mainly for bonds maturing in the near future (in 2022 and 2024). Interest from global investors has declined significantly in Pakistan’s international bonds due to the emergence of several issues in the global and domestic economies.
The strengthening of the US dollar against global currencies, the depreciation of the Pakistani rupee, high inflation around the world and low foreign exchange reserves in the country have made global investors less interested in Pakistani bonds.
The decline in global investor interest in Pakistani bonds is evident from the country’s weak bond trading in the global market.
“Pakistan’s international bonds have become illiquid, meaning daily turnover on exchanges has been reduced to $10-15m these days from an average of $125-150m a day. . As a result, the weak bond trade has a big impact on the country’s bond yields,” he said.
In addition, the floods have also had an impact on the national economy. Flood-related losses are estimated at $20 billion these days, up from $10 billion previously. However, they said, global investors’ concerns are overblown. “Pakistan is now under the IMF program and has full agreement to make the global payment for the current financial year 2023,” Rauf said.
Punjab, the province that produces around 70% of Pakistan’s agricultural economy, remained largely untouched by widespread heavy rains and flash floods. Hence, economic activities would pick up speed in the coming months and address the concerns of global investors.
“But, yet, economic growth would slow to less than 2% in FY23 from a pre-flood estimate of 3.5-4% for the year,” he said.
The Pakistani currency maintained a decline for the sixth consecutive business day, falling 1.21% (or Rs 2.76) to close at a five-week low of Rs 228.18 in the interbank market on Friday.
The rupee is depreciating mainly due to the strengthening of the dollar against other world currencies.
Published in The Express Tribune, September 10e2022.
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