Pakistan dollar bonds slump after Dar vows interest rate cut

News Desk
Thursday, Sep 29, 2022

LONDON: Pakistan's sovereign dollar-denominated bonds fell as much as 8 cents to hit fresh record lows after Ishaq Dar, who took oath as federal minister on Wednesday, vowed to bring down interest rates and fight inflation.

Shorter-dated issues suffered the biggest decline with the 2024 bond being bid at 40.2 cents on the dollar, according to Tradeweb data.

Bonds due in 2025 and 2027 fell just over 4 cents while longer-dated maturities received bids at just over 36.6 cents in the dollar.

Dar also called the rupee undervalued and promised a strong response to resolve the South Asian nation's worst economic crisis.

The bond market reaction strengthened fears of a possible default by Pakistan, hammering its international market government debt.

Long-term worries about Pakistan's finances have been compounded over the last month by devastating monsoon floods.

Last week Pakistan's bonds had slumped to just half their face value after the Financial Times said a United Nations development agency was urging the cash-strapped country to restructure its debt.

The government needs to pay $1 billion on bonds maturing in December. It has interest payments worth around $0.6 billion for the 2022-23 fiscal year but the next full bond redemption is not until April 2024.

Former finance minister Miftah Ismail had repeatedly said that there was no chance of a credit default risk.

The government is seeking debt relief from bilateral creditors and not from commercial bondholders

Ismail said the South Asian country will repay on time its $1 billion sovereign bond due in December.

A large portion of debt is in the form of deposits from “friendly countries” who have promised to roll them over.

Pakistan’s gross financing needs for this fiscal year would likely be lower due to a downward revision in the current account deficit estimates which was now $8.7 billion. Pakistan's total financing needs are estimated at $32.2 billion which stems from debt repayment of $23.5 billion and a reduction in the current account gap, it added. The State Bank of Pakistan’s foreign exchange reserves are likely to reach $11.5 billion by June 2023 compared with $8.4 billion as of July 29.

Tightening of fiscal and monetary policies, falling global commodity prices and the market-driven exchange rate has significantly improved the outlook on the current account deficit.