Goldman Sachs Group Inc. says that Pakistan’s dollar bonds will rebound, overcoming a fractured election mandate, as the leaders of the emerging coalition understand the gravity of the economic crisis and will work together to secure International Monetary Fund aid.
The South Asian nation’s bonds rallied Thursday, led by notes maturing in April 2024, after the third-biggest group in the new parliament pledged support for former Prime Minister Shehbaz Sharif to take office again. Sharif already has a track record with the IMF, having obtained a nine-month, $3 billion program from the multilateral lender last June. The latest bond gains helped pare post-election losses that had reached 5% amid a split verdict.
“While near-term political uncertainty is still high, we think idiosyncratic risks are likely to be resolved,” analysts led by Kamakshya Trivedi wrote in a note, adding that Pakistan’s low reserves and an IMF program expiring in April mean political parties have no choice but to work together, “which should allow for a reversal of the recent under-performance of Pakistan’s USD bonds.”
Sharif echoed some of that urgency this week when he said Pakistan needs to secure a new loan program at the earliest. The nation is running out of time to find the money to meet $25 billion of external debt payments starting July, three times its foreign exchange reserves. Its inflation rate is the highest in Asia, while the economy contracted last fiscal year. Investors demand an additional 11.5 percentage points of yield over Treasuries to buy the country’s bonds, much above the 10 percentage points seen as the threshold of distress.
The IMF has already said its team will visit Pakistan after the new government is formed to discuss a medium-term package.
“We do not see any of these stakeholders to be a holdout in the upcoming IMF negotiations,” said Dhiraj Bajaj, lead portfolio manager for Asia and Emerging Markets debt at Lombard Odier, referring to the major political parties tipped to form a new government. “The only way forward to their success to stay in power is an IMF program, and to then regain bilateral funding and meet their external liabilities. We believe this outcome is good for shorter and mid-dated USD bonds for now.”
The nation’s dollar bonds delivered some of the best returns in emerging markets last year, gaining over 90%. They carried much of that momentum through January as the IMF made its final disbursal under a program that also facilitated bilateral finance from friendly countries, bringing Pakistan back from the brink of default.
Goldman analysts also cautioned that the outlook for Pakistan’s bonds beyond a short-term rebound will depend on global financial conditions. Investors will weigh the risk of sticky US inflation and a longer wait for Federal Reserve rate cuts, which will act as a drag on all distressed debt including Pakistan’s, the analysts wrote.
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