Pakistan sovereign credit under pressure as bonds yields surge to levels seen in Global Financial Crisis

July 27, 2022 (MLN): Pakistan sovereign credit is under renewed pressure as bonds yields surge to levels last seen during the Global Financial Crisis, said JP Morgan in its latest report.

“Pakistan with -40.3% YTD total return, is now the fourth worst performer in the EMBIGD after Ukraine (-72.8%), Sri Lanka (-45.4%), and Argentina (-41.9%),” it said.

The report said that a ‘health check’ on Pakistan sovereign credit is warranted given the implications of the recent state assembly by-elections on the outlook ahead.

The report noted that renewed calls for early general elections following the Punjab state assembly by-elections where the PTI party, led by ex-Prime Minister Imran Khan, won 15 out of 20 seats, will likely increase political uncertainty and add further concerns to the government’s willingness to implement electorally challenging policies likely required to resume and maintain the IMF program.

These events likely reflect a challenging macroeconomic environment in Pakistan in the coming days as already Consumer confidence hit a 10-year low in July, headline inflation shot up to 21.3% YoY in June, and SBP net FX reserves have also once again resumed their downward trend, at $9.3bn as of 15 July.

To recall, Fitch also revised Pakistan's outlook to negative from stable, while affirming its long-term foreign- currency rating at 'B-' due to a significant deterioration in Pakistan's external liquidity position and financing conditions since early 2022. Fitch also sees considerable risks to IMF program implementation and to continued access to financing after the program's expiry in June 2023 in a tough economic and political climate. The outlook change follows a similar move by Moody's on 2 June, citing similar concerns.

These political developments have also overshadowed the slow, but still positive, progress with regards to getting the IMF EFF program back on track, the report underlined.

The disbursement from IMF in addition to potential upsizing and extension of the EFF program should provide Pakistan with $3.8bn of IMF funds for the rest of FY23 which would help to alleviate external financing concerns. This will also unlock further FX inflows from friendly nations.

While the authorities will maintain their external debt servicing ability through the end of this year, the report highlights that Pakistan's 5.625% December 2022 Sukuk bond will likely get paid. The bonds currently trading at 90 offers are also one of the lowest cash price EM sovereign USD bonds with a maturity of less than one year.

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