Islamabad July 26 2022: The specter of political uncertainty delaying the International Monetary Fund’s support for Pakistan is unnerving investors, risking further losses in the nation’s bonds and currency.
The rupee and the country’s dollar bonds are setting fresh record lows and Pakistan’s stocks are among the worst performers in Asia this month as the clock counts down to a $1 billion bond payment due in December.
The nation is striving to stave off fears it will follow Sri Lanka into a default this year with the government working to secure billions of dollars from the IMF and countries like China and Saudi Arabia. Investors are concerned that calls by ousted Prime Minister Imran Khan for early elections may imperil the IMF bailout.
“Political uncertainty will prove to be a persistent risk in Pakistan and instability will continue to fester,” said Sumedha Dasgupta, Asia senior analyst at the Economist Intelligence Unit in Gurgaon, India. “That’s adding to worries about Pakistan’s funding requirements, a large current-account deficit and runaway inflation, which will keep the domestic currency under significant pressure.”
The currency, which is down 23% this year, may drop further to 275 per dollar from about 230 on Monday, according to IGI Securities Ltd. The extra yield investors demand to hold Pakistan’s sovereign debt over US Treasuries exceeded 1,700 basis points on Monday, according to JPMorgan Chase & Co. data. That’s well above the 1,000-basis-point level viewed as a threshold for distress.
Fitch Ratings downgraded the outlook on Pakistan’s credit rating to negative last week, citing deterioration in the nation’s external liquidity position and political risks in the implementation of the IMF program.
The IMF is seeking assurance Saudi Arabia and other nations will follow through with their funding commitments before approving a $1.2 billion loan to Pakistan.
“Political uncertainty was a significant factor in our recent revision of the outlook,” said Krisjanis Krustins, a Hong Kong-based director at Fitch. “Renewed political volatility cannot be excluded in the current environment of slowing growth and high inflation.”
Soothing Concerns
Finance Minister Miftah Ismail has sought to reassure investors, saying in a podcast on state-owned Radio Pakistan that the country is expected to receive the next tranche of funding in late August after the IMF’s board meeting on the 24th of the month.
The State Bank of Pakistan has also sought to ease frayed nerves, saying last week that the nation will meet its elevated funding needs comfortably with the IMF bailout remaining on track. The South Asian nation needs $33.5 billion in the fiscal year through June 2023, while available financing stands at $35.9 billion, it said.
The central bank is also stepping up measures to defend the currency. It asked commercial lenders to manage import-payment requests from their own inflows, such as exporter accruals and remittances, according to people with knowledge of the matter.
Pakistan owns just enough foreign-exchange reserves to cover under two months of imports.
“The key here will be that the political events do not impact the ongoing discussions with the IMF,” said Mattias Martinsson, chief investment officer of Tundra Fonder AB in Stockholm. “Short-term, the picture is very difficult to predict.”
