Pakistan bonds’ surge belies bigger reform hurdles


LONDON: Investors have piled back into bonds in Pakistan following cash infusions and optimism over multilateral support, but the nation has secured only enough help to limp to autumn elections, experts said.

The rally in international bonds issued by the country has intensified over the past two weeks, seeing returns on Pakistan’s bonds soar to above 45%, making it some of the best performers in their asset class, according to JPMorgan data.

But the boost in the bonds belies the difficulties the nation faces implementing major reforms once new leaders arrive after upcoming elections.

“It’s not enough to resolve the country’s issues – not nearly enough,” said Carlos de Sousa, emerging market portfolio manager at Vontobel Asset Management said of Pakistan’s recent funding gains.

Pakistan’s 11th hour deal for $3 billion from the International Monetary Fund (IMF), after months of talks got official approval this week. Saudi Arabia and the UAE followed with $2 billion and $1 billion infusions.

This fresh cash means Pakistan is unlikely to default on its debt in the next six to nine months, said de Sousa. Elections in the politically volatile country must be held by early November.

Reserves remain precariously low at $9.8 billion as of 7 July, only roughly two months of imports. JPMorgan pegs its external financing needs at greater than $30 billion.

Even in the near-term, Pakistan will have to stay on top of tricky reforms such as allowing its currency to move somewhat freely.

“Pakistan has a history of undershooting fiscal targets and the risk of fiscal slippage is high in an election year,” JPMorgan said in a note.

The real challenge for Pakistan, which is still recovering financially and physically from last year’s devastating floods, comes after the contentious elections, when it will likely need to secure a longer-term IMF program.

This will likely require punishing, and unpopular, cuts to food and fuel subsidies, increases to electricity prices and loosening controls on the rupee.

“It gives some space for them to be able to go through the political moment that they’re going through now,” said Roberto H. Sifon Arevalo, head of global sovereign & international public finance ratings at S&P Global, adding “its still a very complicated political situation.”

Reflecting the challenges ahead, the Pakistan bond rally was heavily skewed towards shorter-dated maturities.

Investors and pollsters said the tough times could force Pakistan leaders to reckon with needed fiscal reforms.



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