Pakistan is seeing an unprecedented inflow of foreign investment in debt instruments.
The latest figures showing the number has crossed $1 billion and the analysts expect it to reach a record of $3 billion by the end of the current fiscal year, reported Financial Times.
According to the report, the benchmark interest rates have stood at 13.25 per cent since the last rise in July. One senior official at the central bank said that this had contributed to inflows of about $1 billion, with more likely to arrive in the coming months.
The central bank has been “Pitching the Pakistani bond market directly” to foreign investors, said Saad Bin Ahmed, equity head at brokerage Arif Habib.
There are concerns that this is hot money, and at a single click this money will go out, possibly when the central bank cuts the policy rate. But my expectation, considering the state of the economy, is that they may not even cut the rates until July 2020.
Pakistani stocks have also pushed higher. The main Karachi stock index is up 13 per cent over the past month, making it the best-performing bourse of 94 tracked by Bloomberg.
Charles Robertson, chief economist at Renaissance Capital, told Financial Times that the case for buying Pakistan’s bonds was straightforward. “Where else can you get double-digit yield on an undervalued currency?” Mr Robertson noted that the rupee was at its lowest level in 25 years, measured by its real effective exchange rate, meaning foreigners could earn outsized returns on local-currency bonds. This is “the first new emerging market reform story since Egypt in 2016”, he added.
Fidelity International portfolio manager Paul Greer told FT that despite Pakistan’s large fiscal and current-account deficits “the economic reform trajectory in the country has been improving of late and the imbalances are now moving in the right direction”.
But the president of a privately owned Pakistani bank warned that high-interest rates were having a “crippling effect” on investment by domestic companies. These rates will need to be brought down to encourage businesses to borrow, he added. “The problem is that if you bring down interest rates, that may discourage the inflow of foreign money. It’s going to be a very delicate balancing act.” added the report
This year, the government in Islamabad reduced withholding taxes for foreign investors, giving a further boost to sentiment, said the report.