Pakistan’s Fiscal Troubles Justify Slump in Bond Prices: JPMorgan

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JPMorgan has called the slump in Pakistan’s bonds to a third of their face value justified, Reuters reported on Wednesday.

The slump in the country’s bonds follow the devastating floods and recent warnings by top government officials that some debt payments may need to be deferred.

Pakistan was already struggling with its finances and the massive cost of relief and rehabilitation has raised fears that the country could default.

Last week, Finance Minister Ishaq Dar had said that he would ask for payments to be deferred on some $27 billion worth of non-Paris Club debt, most of which is owed to China.

Pakistan is currently in an International Monetary Fund (IMF) programme and is set to receive around $4 billion in post-flood aid and loans from institutions such as the World Bank, Asian Development Bank, and United Nations. However, the country’s central bank reserves are at a 3-year low of $7.6 billion.

“Pakistan’s debt and fiscal dynamics flag rising solvency concerns,” JPMorgan’s analysts wrote in a note.

“Political/fiscal, flood-related external risks, and possibility of a debt moratorium – and their implications on the IMF programme as well as FX liquidity – likely justify current sovereign bond prices,” the note said.

The country’s bonds have plunged to around 33-35 cents on the dollar this month which leaves them broadly in line with other countries seen as at risk of default such El Salvador, Ghana and Ecuador.

“The market is certainly pricing a risk of an external debt restructuring,” JPMorgan said, also laying out a “hypothetical” scenario where payments on those international market bonds, also known as Eurobonds, were suspended for two years.

The scenario, which would also see a one-third reduction in bond “coupons”, would result in a cumulative saving of $7.5 billion for the government by the end of 2024, JPMorgan said although they also cautioned that China might not be willing to accept the same kind of terms on its loans.

The main concerns are related to the country’s domestic debt though.

Nearly two-thirds of Pakistan’s public debt stock, which is now close to 80 percent of GDP, is domestic and domestic interest payments account for nearly 90 percent of overall interest payments.

Earlier this month the IMF had judged Pakistan’s debt as sustainable with nominal gross public debt forecast to drop from 78.9 percent of GDP in the 2022 fiscal year to 60.7 percent of GDP in 2027.

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