The outlook for Pakistan is worsening, says Morgan Stanley in a report released on Friday. The country has “underperformed significantly since February”, with spreads widening up to 1250 basis points and some bonds selling for as low as sixty cents on the dollar.
“The key driver has been rising concerns about Pakistan’s external funding gap” say the authors of the report. The deteriorating current account deficit, “increased risks to the IMF disbursements” and slowing remittances are principally responsible.
“We expect total funding need to be $35 billion for 2022” the report says. The current account deficit could widen to $17bn, and “predetermined drain on reserves” is $18bn. The authors consider external financing requirements under two scenarios: with and without and IMF program. “[I]n a better scenario, we estimate the available sources to be $32bn, assuming Pakistan will receive the next IMF tranches and issue Eurobonds successfully. This means a $3bn funding gap.”
This means even with a fund program and a successful Eurobond floatation, there will still be $3bn required to plug the financing gap in 2022.
The real problem begins in the absence of an IMF program. “[I]f Pakistan does not get the rest of the EFF loans from the IMF, it would add $2.8bn of funding pressure. And if Pakistan is not able to roll over the global sukuk bond due in December 2022 it adds another $1bn of funding pressure. In this case we estimate the funding gap to be $8bn, also driven by lower private sector loan disbursements”.
The authors advise their clients to steer away from Pakistani paper. “We suggest a dislike stance on Pakistan” they say bluntly, pointing to the “downside risks regarding funding” and persistent uncertainty around the talks with the IMF, with oil prices continuing to rise.
The authors also point out risks to Pakistan’s credit rating of B negative given these powerful vulnerabilities. “[W]e don’t think that now is a good time to be long on Pakistan despite their cheaper valuations.
Pakistan’s bonds rallied on Friday as the government began the process of fuel price adjustments on late Thursday night. The adjustment was cheered by the markets since it is the first step down the road the country has to walk to restore its economic viability.