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JPMorgan says Pakistan's troubles justify slump in bond prices

  • Bonds have plunged to around 33-35 cents on the dollar this month which leaves them at just a third of their face value and broadly in line with other countries seen as at risk of default such El Salvador, Ghana and Ecuador
Published October 19, 2022

LONDON: Investment bank JPMorgan has called the slump in Pakistan's bonds to just a third of their face value justified, following the country's devastating floods and recent warnings by officials that some debt payments may need to be suspended.

Pakistan's finances were already strained before this month's floods, but the cost of repairing the damage and providing support for those affected have raised fears that it may now default.

New Finance Minister Ishaq Dar told Reuters last week that he would ask for payments on some $27 billion worth of non-Paris Club debt largely owed to China to be pushed back, although he would not pursue actual write-offs.

Pakistan seeks billions of dollars in new loans after floods

Pakistan is in an IMF programme and set to receive around $4 billion in post-flood aid and loans from the likes of the World Bank and United Nations. But as it stands its $7.9 billion of foreign exchange reserves covers key imports for barely a month.

"Pakistan's debt and fiscal dynamics flag rising solvency concerns," JPMorgan's analysts wrote in a note on Wednesday.

"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."

Talks with IMF, World Bank: Ishaq Dar expects positive outcome

Those bonds have plunged to around 33-35 cents on the dollar this month which leaves them at just a third of their face value and 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.

Apparently on PM’s debt relief plea: Pakistan’s dollar bonds plunge

The main concerns revolve around domestic debt though.

Nearly two-thirds of Pakistan’s public debt stock, which is now close to 80% of GDP, is domestic, and domestic interest payments account for nearly 90% 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% of GDP in the 2022 fiscal year to 60.7% of GDP in 2027.

Pakistan default fears spike on report of UN debt suspension advice


Comments are closed.

Pakistani1 Oct 19, 2022 07:51pm
JPM analysis is correct. However, lack of action from Pakistan government on controlling its expenses is making the situation worse. The size of federal and provincial cabinets/advisors, perks for assembly members, senior bureaucrats, judiciary and armed forces are putting huge strains on the economic situation. Theres is a need for those in power live within means and control overall expenses.
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samir sardana Oct 19, 2022 08:13pm
It is a shallow market,and an aberration of a price . Pakistan is NOT Salvador Ghana is an Oil,Gold and Cocoa producer,with a much smaller population Ecuador is an Oil and Agri producer,with a much smaller population BOTH THESE NATIONS TOOK THE IMF BAILOUT,AND THEIR BOND PRICES JUMPED ! ONCE PAKISTAN GETS THE FLOOD FINANCIAL DEBT RELIEF AND THE FATF EXIT - PAKISTAN BOND RATES WILL JUMP ! THIS IS JUST A BLIP ON THE SCREEN,AND A MEANINGLESS BLIP,AS THERE IS NO LIQUIDITY, IN THE DEBT MARKET ! dindooohindoo
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Tariq Ikram Oct 20, 2022 10:03am
Wake up Pakistan ... salvation lies ONLY in boosting exports !! Of the products we ALREADY export at USD 500K per product cluster (ie per HSCode at 6 digit level), the world demand is 11 Trillion Dollars! All we need is 1% share and we can reach usd 100bn! Wake up Pakistan!!
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