SBP terms foreign investment in Pakistan debt markets sign of 'growing confidence'

• SBP believes that the international confidence has been restored after adoption of several reforms such as shift to a market based exchange rate system.
• It dismissed the concept that foreign investors are luring to Pakistan’s debt instruments on account of double digit interest rate.

The recent surge of investment by foreign investors in debt instruments is a positive sign for Pakistan economy, the State Bank of Pakistan (SBP) said on Monday.

“Recently, international investors have started investing in debt instruments issued by the Government of Pakistan. This is largely a manifestation of their growing confidence in the positive outlook for the economy. As endorsed by international financial institutions, including the IMF, the ADB and the World Bank, and rating agencies, our reform program is beginning to show results,” the central bank said in a statement.

Pakistan bond market has become a profitable option for foreign investors, with sovereign bonds witnessing an unprecedented inflow of foreign money and global investors having purchased 1-year bonds worth $642 million in November alone.

Pakistani bonds offer high returns, Pakistan's central bank has more than doubled its policy rate to 13.25pc – the highest in Asia – to help stabilize the economy. The foreign inflow in bonds is expected to reach a record $3 billion by the end of the fiscal year.

The SBP was of the view that the international confidence has been restored after adoption of several reforms i.e. the shift to a market based exchange rate system “which has addressed previous concerns regarding the sustainability of the exchange rate regime,” alongside improvement in Pakistan’s balance of payments and reserve buffers.

The State Bank dismissed the concept that foreign investors are luring to Pakistan’s debt instruments on account of double digit interest rate. “Interest rates have been higher in the past—for example interest rates were around 13.75 percent on average in FY11—but our debt markets did not attract interest from international investors,” said SBP.

The central bank further said that investment in government securities by international investors provides several benefits to the economy.

“First, such investment helps to deepen capital markets by increasing the pool of funds available in the local market and diversifies the investor-base. Second, such investment helps to allow banks to deploy available funds for lending to the private sector since there is growing competition from international investors for placements in government securities.

“Third, such interest by international investors raises the demand for government securities and accordingly lowers yields and reduces the cost of borrowing for the government. Fourth, the growing role of international investors in the local debt market may serve as a positive feedback mechanism for further improving domestic practices, policies, systems and institutions in line with international best practices.

At the same time risks posed by such investments are limited at current levels, said SBP.

“First, the current level of such investments at $1.2 billion accounts for less than 2 percent of the total outstanding marketable government securities and less than 0.5pc of GDP. Second, this investment accounts for less than one-fifth of the increase in SBP’s net reserve buffers at current levels; the bulk of the increase in the net reserve buffers is accounted for by the continued current account improvement. Third, the tenor of such investments has been increasing with more investments in longer dated instruments as investors’ confidence grows.”