Pakistan set to dodge near-term default

August 29, 2022 (MLN): Pakistan is set to evade a near-term default amid expectations the International Monetary Fund (IMF) will resume its $6 billion bailout program, but a rally in assets may fizzle out amid escalating political tensions, reported Bloomberg.

Columbia Threadneedle Investments, Tellimer Ltd. and Natixis SA predict Pakistan will win loan approval from the IMF board when it meets on Monday, paving the way for the release of $1.2bn in immediate funds.

One day later, the focus will shift to a court hearing where former premier Imran Khan has been asked to appear as he battles a string of legal troubles. 

“I do think the bulk of the market rally is already in the price,” said Eng Tat Low, an emerging-market sovereign analyst at Columbia Threadneedle in Singapore. “I expect the next 12 months to be challenging with the general elections looming. The risk of worsening political backdrop is definitely still considerable and elevated, and is a risk that is unlikely to dissipate anytime soon.”

Pakistan’s dollar bonds are the top performers in emerging markets in August after Belarus, while the rupee has soared above its peers as investors cheer the prospect of IMF aid. But the political drama that is unfolding threatens to undermine the fragile financial stability.

“The political uncertainties will persist with speculations on early elections,” said Junyu Tan, an economist at Natixis in Singapore. “This will pose a major risk for Pakistani assets.”

The mixed performance in Pakistan’s dollar bonds underscores the nation’s rocky path ahead. Notes due in December were indicated at about 94 cents on the dollar on Friday from a low of 85 cents in July, as investors grow more confident the debt will be repaid. Meanwhile, bonds due in 2031 were still quoted at below 60 cent on the dollar in the distressed territory.

Columbia Threadneedle expects Pakistan bond prices to be range-bound in the next 12 months. The dollar bonds have returned almost 16% to investors this month, according to a Bloomberg index. Its stocks have rallied 6%.

The rupee, which surged 8% this month to 220.52 per dollar on Friday, will probably weaken to 240 by the end of the year, according to London-based research firm Tellimer.

“Pakistan’s government will need to deliver on its reform promises to set its debt and reserves on a sustainable path,” said Patrick Curran, a senior economist at Tellimer. “Any deviation from its reform targets, however minor, could shatter market confidence and send the rupee back into a tailspin.”

Pakistan has had a tumultuous track record with the IMF. The government secured a bailout program in 2019 only to have it stall several times due to failure to meet some loan conditions. The resumption of the program will hand Prime Minister Shehbaz Sharif a massive boost to his leadership while helping avert what would be the second default in Asia this year after Sri Lanka, it added.

According to Bloomberg Economics, the country needs to pay at least $3bn to service debt in the first half of fiscal 2023. Meanwhile. the central bank expects foreign-exchange reserves to rise to about $16bn this fiscal year from $7.8bn, as the IMF loan would also catalyze multilateral and bilateral lending.

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