KARACHI: US multinational investment bank JP Morgan sees more opportunities in Pakistan’s sovereign credit with caution about challenges in implementing IMF’s recalibrated program as country is expected to tap into the international debt market for an additional $ 1.5 billion.
In a latest report, JP Morgan said there had been positive developments in Pakistan in recent months related to the resumption of the International Monetary Fund (IMF) deal, improving current account and budget deficits. and the resumption of growth.
“The favorable reading of recent IMF developments has been positive for credit amid strong investor interest in Pakistan. We are adding an outright new Pakistan of 8.25% in 2024, ”he said.
However, there are challenges related to ‘risks to the deterioration of the current account resulting from the discoloration of remittances and rising commodity prices, high risks of frequent waves of COVID-19 given the low immunization levels weighing on growth prospects, largely negative real returns and political pressure to stimulate growth, which would likely require a reassessment of the IMF’s program targets, ”he added.
After a three-year hiatus from the Eurobond market, Pakistan issued $ 2.5 billion in three-tranche Eurobonds in April following the resumption of the IMF’s program which is stimulating investor interest.
The country is expected to raise an additional $ 1.5 billion in gross sovereign issues by the end of the year, which could come around the time of the $ 1 billion Eurobond maturity in October. .
JP Morgan expects the implementation of the IMF’s current $ 6 billion expanded fund facility to remain difficult. After being suspended for almost a year due to COVID-19, the EFF resumed in March 2021. The initial program began in July 2019, but after completing a first review in December 2019, both sides have agreed to suspend it completely as a COVID-19 shock. changed the macro image.
Although the IMF supports the government’s desire to make changes to the IMF’s recalibrated agreement, “the further deterioration of the COVID-19 situation in Pakistan amid low immunization levels is a headwind weighing on growth prospects and the ability to meet the objectives of the IMF’s recalibrated program ”.
In fiscal year 21, the budget deficit is expected to reach 7.1% of GDP. The debt / GDP ratio continued to decline during FY22 (81.5%) against 83.9% during FY21, against 87.6% revised during FY20. The current account deficit is expected to deteriorate during FY22. The current account deficit is expected to reach $ 8 billion (2.4 percent of GDP) in FY22, up from $ 2.3 billion in FY21.
Foreign exchange reserves (excluding gold) are expected to reach around $ 19.1 billion by June 2022, up from $ 16.8 billion in April 2021. This is due to the relatively large financial flows from Eurobond issues. , as well as bilateral and multilateral flows. Above all, the central bank’s more flexible position on the exchange rate facilitates currency purchases and reduces its net short swap / forward position. The real policy rate in Pakistan is deeply negative (-3.9% when deflated by headline inflation, and slightly positive when deflated by core inflation).
“We have signaled how necessary a rate hike might be as global financial conditions become less favorable,” he said. “We expect key rates to hike by 100 basis points later this year, but the risks of inaction remain high.”
Pakistan was a significant and stable sovereign underweight in JP Morgan’s survey of emerging market clients since early 2019.
“However, investors hedged their short positions heavily, reducing credit to neutral in April. This corroborates both anecdotal conversations with investors waiting for the new issue to re-engage in Pakistan following the positive momentum of the IMF program. , and explains the strong price action of new Eurobonds issued in April, which rose 4 to 7 points just days after their issuance, ”It said.“ Equally strong demand for the recent green Eurobond almost $ 500 million sovereign debt, with a final order book of around $ 3 billion, could lead to a spillover effect and additional near-term demand for sovereign bonds. “