What policy cut? Foreigners buy T-bills for the first time since Feb

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KARACHI: In a surprising development, after weeks of divestment, foreign investors bought $191 million worth of treasury bills (T-bills) on April 17, according to data released by the State Bank of Pakistan (SBP).

As per the Special Convertible Rupee Account (SCRA), which tracks inflows and outflows from foreign countries, this now nudges the cumulative net investment in T-bills from July 2019 to date to now above $1 billion.

It previously dipped to $841 million just the week prior. The cumulative net investment since July had stood at less than $1 billion last in October 2019, when it stood at $441 million.

This is the first time foreigners have bought T-bills since February. In fact, starting on February 28, foreigners divested $67 million of T-bills on February 28, and then a further $103 million worth of T-Bills on March 3.

This kicked off a trend of foreign outflows leaving the country that continued unabated all though March, and much of April.

The total gross divestment during March 2020 stood at $1.735 billion, while gross divestment in April 2020 as of just April 16, had reached $550 million.

To recap: previously, $85 million worth of T-bills on April 15, divested $54 million worth of T-bills on April 13; divested $82 million worth of T-bills on April 8; divested $73 million worth of T-bills on April 6; and divested $48 million worth of T-bills on April 1.

In total, as of last week, foreigners had divested $2.6 billion worth of T-bills since July 2019.

It remains to be seen if this is a one-off event, or it will reverse the trend of divestment. So far, it has improved the net divestment figure of April, which now stands at $359 million.

What makes this even more surprising is that foreign inflows or ‘hot money’ is typically associated with higher interest rates. In fact, the preceding eight months had seen positive inflows of varying amounts, which were attributed to the SBP maintaining a generally high policy rate, at 13.25pc. Cumulative net investment in T-bills comfortably climbed from $15 million in July 2019 to $3.099 billion in February 2020.

But then in the space of one month, beginning March 17, the SBP cut the policy rate by 425 basis points on three different occasions, to 9pc. The decisions were taken to create a more favourable business climate in light of the global COVID-19 pandemic.

For its part, the SBP has always maintained that foreign outflows or inflows have less to do with Pakistan’s current policy rate, and more to do with Pakistan’s status as an emerging market or developing country.

The divestment in March and April could be attributed to the COVID-19 crisis. In times of uncertainty, foreigners were more likely to sell their T-bills from places like Pakistan and India, and invest in more developed markets like Japan or the US. In fact, many developed countries were divesting from emerging markets in order to have liquidity.

In the monetary policy announcement on March 17, SBP Governor Reza Baqir has said globally, because of coronavirus, there has been a general ‘flight to safety’, that was not linked to whether the SBP significantly changed its policy rate or not.

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