Dollar bond yields surge following the Prime Minister’s debt relief appeal.
The prime minister’s appeal was perceived by global bond investors as an indication that the country would fail on foreign debt repayments. On December 5, 2022, Islamabad is set to repay $1 billion on a maturing Sukuk.When a country is in a financial crisis, the prices of its bonds fall and its yields – the rate of return – rise, and vice versa.
Previously, the Financial Times stated, citing a UN policy note, that Pakistan should delay international debt repayments and restructure debts with creditors following recent floods that exacerbated the country’s financial situation.
According to the memorandum, which the UN Development Programme will discuss with Pakistan’s government this week, the country’s creditors should explore debt relief so that policymakers can prioritise disaster response funding above loan repayment.
The memo also offered debt restructuring or swaps, in which creditors would waive repayments in exchange for Pakistan committing to invest in climate-resilient infrastructure, according to the Financial Times.
“Today (Friday), Pakistan’s dollar bonds maturing in 2022 plummeted by 12%, while dollar bonds maturing in 2024 and 2025 fell by 15% and 17%, respectively,” said Topline Research analyst Umair Naseer.
According to AHL Research, the yield on the bond maturing in December 2022 has risen by 6,560 basis points (bps) to a record high of 104.7%.Similarly, bond yields maturing in 2024 and 2025 increased to 60.7% (up 1,542bps) and 39.2% (up 831bps), respectively.
On average, Pakistan’s worldwide bond yields are substantially lower than 10%.Bond investors saw high default risk despite the country’s default risk being quantified through CDS (currency default swap) and saw no significant movement over the day, according to Naseer.
However, the country’s foreign exchange reserves have continued to fall with each passing week, as authorities use the reserves to partially fund import payments and foreign loan repayments in the face of low inflows.
Since January 2022, the foreign exchange reserves have been rapidly reduced, with only $8.3 billion remaining. Despite receiving a $1.16 billion loan tranche from the International Monetary Fund (IMF) in early September, they are barely enough for a six-week import cover at the moment.
Experts, on the other hand, anticipate the reserves will rebuild after the IMF resumes its $6.5 billion loan programme on August 29, 2022. Following this, inflows from other multilateral and bilateral creditors, including the World Bank (WB) and the Asian Development Bank (ADB), will occur (ADB).
Furthermore, the international community has offered $1.5-2 billion in disaster help. Their arrival would also help to replenish the stockpiles.
The government expects reserves to rise to roughly $16 billion by June 30, 2023.
In any case, Finance Minister Miftah Ismail attempted to clarify the situation resulting from PM Sharif’s remarks and regain the confidence of global bond investors later in the day on Friday.
“In light of Pakistan’s climate-related calamity, we are requesting debt forgiveness from bilateral Paris Club creditors.” “We are not seeking, nor do we require, any relief from commercial banks or Eurobond debtors,” Ismail stated on Twitter.
“We have a $1 billion bond due in December that we will pay in full on schedule. We have been and will continue to service all of our commercial debt. Our Eurobond debt is merely $8 billion, with repayments due between now and 2051. That is not a significant hardship. A considerable percentage of our debt is held by friendly countries that have stated their intention to re-roll their deposits.”
Because trade volumes on Pakistan’s global bonds are now low, “a minor selling pressure on its dollar bonds may have resulted in a significant price decline, we feel,” Topline Research analyst said.
Finance Minister Miftah Ismail has reaffirmed the government’s determination to pay its debt obligations while continuing with the reform process that has already begun. “As a result, we believe that Pakistan’s debt payment default is unlikely in the immediate run.”
Furthermore, the predicted multilateral and bilateral flows following the floods are likely to put strain on the country’s foreign exchange reserves. The World Bank, Asian Development Bank, Asian Infrastructure Investment Bank, and a few friendly countries have already committed $1.5-2 billion in flood-related aid/funding.
Current account pressures have also begun to diminish as the government limited imports, with the August 2022 current account deficit falling to $703 million from $1.2 billion in July.”We anticipate that this trend will continue, which will help the foreign account situation. Any increase in international oil prices would remain a significant danger.”
