ISLAMABAD – Pakistan’s sovereign bonds have never been a highly valuedcommodity, but global investors pumped $642.5 million into local currencybonds in November. The question is, how long will it last?
Pakistan’s local debt market has rarely been a place even the leastrisk-averse investors have chosen to venture. But the Asian country’ssovereign bonds are seeing unprecedented inflows of foreign money, withglobal investors buying up 1-year bonds worth $642 million (€580million) in November alone. This is expected to reach a record $3 billionby the end of the fiscal year.[image: Supporters of the Jamiat Ulema-e-Islam (JUI-F) party take part inan anti-government march towards Islamabad, on October 31, 2019]link
Foreign direct investment surged 200% in the first half of 2019, accordingto the financial adviser to the prime minister, Abdul Hafeez Shaikh,while stocks have also risen. The main Karachi stock index is up 13% overthe past month, making it the best-performing stock exchange of 94 trackedby Bloomberg.
The central bank doubled the main benchmark interest rate to 13.25% thisyear, which is now the highest in Asia, as part of efforts to rein ininflation and show its willingness to reform public finances as a precursorto IMF support.[image: Pakistani Prime Minister Imran Khan]link
But the rupee is down almost 50% against the dollar this year and is one ofthe world’s worst-performing currencies. This followed the central bankintroducing more flexibility to the existing managed-float system. Thelower real effective exchange rate, however, means foreigners can earn farhigher returns on local currency bonds. And therein perhaps lies the rub.
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“A double-digit yield on a cheap currency is a good value trade initself,” Charles Robertson from Renaissance Capital told DW. “I wouldrecommend investors keep buying Pakistan while it offers double-digitinterest rates,” he added.
Even central bank rate cuts of a few percent would still make Pakistaninteresting, Roberston went on. “The current policy choices of Pakistanoffer the country the best chance of getting onto a sustainable growthpath. Borrowing costs are lower thanks to foreign investors buyinggovernment debt.”
Of 1-year papers bought in November, 55% were from the UK and 44% from theUS, central bank data showed.
Pakistan also said recently it will issue $1 billion worth of so-called”panda bonds” in the first quarter of 2020 in the Chinese market for thefirst time in yuan, Habib Bank CEO Muhammad Aurangzeb said. A Panda bond isa Chinese renminbi-denominated bond from a non-Chinese issuer, sold inChina.
