Exploring Pakistan's Economic Landscape and USD Bond Market
IMF Support Influence
The bolstering of Pakistan's USD bond market can be partly attributed to the IMF's support in July 2023, which instilled investor confidence and was a key driver behind the high returns despite distress levels.
Political Stability Post-Elections
The bolstering of Pakistan's USD bond market can be partly attributed to the IMF's support in July 2023, which instilled investor confidence and was a key driver behind the high returns despite distress levels.
Future Economic Health
Going forward, the potential upside for Pakistan's currency and USD bonds is a subject of interest, with a focus on how the newly elected government negotiates continuity with the IMF program set to expire in April.
Assessing Risks to Pakistan's Economic Progression
External Risks
Gross FX reserves in Pakistan are low relative to upcoming liabilities, presenting risks which are somewhat mitigated by a substantial percentage of debts being bilateral and multilateral in nature.
Fiscal Risks
Despite rising interest payments, inflation has been the primary contributing factor, not reflecting a direct impact on the debt ratio due to a concurrent increase in growth and interest rates.
Political Risks
The outcomes of the recent general elections and the political responses thereof have the potential to impact the country's economic policies and investor confidence significantly.
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Unpacking the Dynamics of Pakistan's Debt Profile
Increased Exports
The devaluation of the PKR has, to some extent, positively adjusted the balance of the current account by catalyzing an increase in export activity.
Public Sector Debt
The bulk of Pakistan's external debt is public, with multilateral and bilateral agencies as the primary creditors, suggesting a degree of negotiation flexibility.
Credit Rating
As fiscal and economic conditions improve, Pakistan's credit rating is poised for potential upgrades, which would enhance its standing in the global market.
Future Outlook: Pakistan's Currency and USD Bonds Potential
Inflation Control
With inflation projected to decline, there exists an opportunity for the central bank to cut rates in the second half of 2024, benefitting bond yields and the broader economic canvas.
Yield Curve Dynamics
The current flat-to-inverted yield curve on Pakistan's USD bonds indicates room for steepening, improving the landscape for longer maturity bonds.
Currency Valuation
The Rupee appears undervalued, providing an attractive carry for investors, with the potential to improve if real interest rates turn positive alongside a decreasing inflation trajectory.