JP Morgan puts weight behind Pakistan's economy, but cautions over challenges

  • In its report, 'Pakistan: Reassessing the investment thesis', JP Morgan says impact of remittances to fade in coming months
Published June 10, 2021

JP Morgan, a leading financial services company, has put its weight behind Pakistan's economy, advising a long position on the South Asian nation, with particular focus on sovereign credit rather than local bond markets.

In its report, JP Morgan also issued a note of caution on Pakistan's current account figures from fading remittances and higher commodity prices.

Ït said there have been positive developments in recent months including the $6-bilion International Monetary Fund (IMF) package, a narrowing current account deficit, recovery in the rupee, in addition to GDP growth in the outgoing fiscal year. However, challenges remain for Pakistan including risks surrounding "current account deterioration; elevated risks of frequent Covid-19 waves, largely negative real yields; and political pressure to stimulate growth, which would presumably require a reappraisal of IMF program targets".

The report titled, 'Pakistan: Reassessing the investment thesis' said that its risk-reward scorecard, first introduced in July 2018, is improving for Pakistan's assets, but "further improvement is needed to add local market longs".

"Preliminary estimates for FY21 growth points to a sharp rebound from the Covid-19 shock; and the fiscal deficit should continue to shrink in GDP terms.

“We add a new outright long Pakistan 8.25% 2024 in line with our EM Asia sovereign theme of picking attractive yielding short duration bonds, while staying MW in the Model Portfolio given global considerations,” said the report, advising a market weight stance.

The report comes at a time when Pakistan is looking to move towards a growth-oriented economic policy. In the latest Economic Survey 2020-21, released on Thursday, Pakistan announced that it has provisionally registered economic growth of 3.9%, a sharp reversal from its performance in the previous year when it contracted by 0.5% -- the first such decline in almost seven decades.

The JP Morgan report said that the main hurdle for initiating long positions is valuation: "the PKR REER is around its long-term average, while nominal and real yields in T-bills and T-bonds are lower than yields on offer elsewhere in the frontier universe.

"After a three-year absence from the Eurobond market, Pakistan issued $2.5 billion in a triple-tranche Eurobond in April following the resumption of the IMF program. We forecast an additional $1.5 billion of gross sovereign issuance to year-end, which might come around the time of the $1 billion Eurobond maturity in October.

"Focusing on the gross external financing requirement, the outcome so far has been more favorable than our initial forecast considering a combination of better current account dynamics, as well as greater savings through DSSI, and IMF support."

Pakistan has issued a number of sovereign bonds in recent past to meet its external financing needs. Last week, Pakistan's first green Eurobond was issued by the Water and Power Development Authority (WAPDA) to raise $500 million for the construction of Diamer-Bhasha and Mohmand dams.

Pakistan's WAPDA raises $500m in country's first green bond issuance

IMF programme to provide support

Pakistan is currently in the $6-billion IMF programme as the country struggles to maintain a balance between boosting growth, and controlling a bulging current account deficit. JP Morgan said the resumption of the IMF program has been a positive development as it has renewed interest in Pakistan and boosted investor confidence.

JP Morgan said that it expects that the ongoing fiscal consolidation of the government will continue in the upcoming FY22 budget. The report was of the view that external financing especially support from the IMF and the issuance of Eurobonds will remain an important funding source for the budget.

It also expected the economy to continue grow by around 4% in the next fiscal year i.e. FY22. "However, the risks of restrictive actions to contain the virus remain and continue to weigh on the growth outlook."

Highlighting the State Bank of Pakistan (SBP) monetary policy, the report said that it believes a hike of 100 basis point is likely later this year. At its May meeting, the Monetary Policy Committee (MPC) of SBP decided to maintain the policy rate at 7% for another two months.

SBP keeps interest rate unchanged at 7%

Remittance inflows

Talking about Pakistan's remittance inflows, JP Morgan expects the impact of remittances to fade in coming months. Remittances from overseas workers stood at $26.7 billion during 11 months of the ongoing fiscal year, up 29.4% from a year ago and higher than the entire FY2020 level by $3.6 billion.

Current account deficit

The report forecasted that Pakistan's current account deficit is to widen albeit at a slower pace. Additionally, JPMorgan expects foreign exchange reserves to rise in the coming months. “We expect foreign exchange reserves (excluding gold) to rise to around $19.1 billion by June 2022.”

It added that the liquidity relief through both the Debt Service Suspension Initiative (DSSI) and a potential increase in IMF Special Drawing Rights (SDR) would also boost Pakistan FX reserves, says the report. “We think both these developments will continue to provide a favorable backdrop for near-term liquidity concerns in Pakistan.”


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