Given the recent phenomenon of portfolio investment in bond market (hot money), Pakistan is fast becoming exposed to global financial shocks. The oil war between Saudi and Russia in the aftermath of COVAD-19 has resulted in estimated outflow of $500 million (hot money) from T-BIlls on first two days of the ongoing week. The currency market depreciated by around 2.5 percent due to demand of dollars. The amount takes 1-3 days to settle, the selling of Monday and Tuesday will be fully reflected in SCRA by Friday.
By the end of this week, T-Bills outflows from SCRA will reach $700-750 million during March to date. Portfolio investment in T-bill will concurrently decline by one fourth from $3.2 billion to $2.5 billion. The impact on SBP reserves will be similar. The reserves may not fall by same number as the inflows related to exports and remittances are to dilute the impact. Reportedly, Export transactions were selling more in advance yesterday. This may help in financing some of the outflows. But that would lower the future export related flows. Apart from that, banks are exhausting their ammunition, leaving less room for further firefighting, if needed.
Some pundits are of the view that T-Bills outflow is in anticipation of decline in policy rate at home in upcoming monetary policy review. That argument is misplaced as the outflows are in line with other emerging markets. The money is going out due to global view taken by foreign institutional investors. For example, portfolio investment in Indian equity market fell by $3 billion in Feb and March to date. The bond flows in all the emerging markets is in red during this week. Foreigners took out $1.2 billion from India in bond market this week. The outflow is $6.9 billion in Japan, and $2.8 billion each in Korea and Taiwan.
Pakistan is no exception. Official flows of SCRA are showing $194 million in first two days of the week. Rest of the transactions that have taken place since will settle by Friday. On same token, outflows from other emerging economies in this week will enhance as settlements shall take place in respective markets.
The question is when will the mayhem stop. Initial reaction may have been exaggerated. Monday was the worst day with around $350-400 million worth T-Bills sold by foreigners in a day. The amount reduced to $100-150 million on Tuesday. Wednesday is expected to have been marginally better. T-Bill auction took place yesterday as well. Let’s see whether there will be any inflow in it.
Time are fluid. It’s hard to say what the overall impact of the global slowdown on Pakistan shall be. Having low oil prices in the band of $30-40 is good for Pakistan. But if things go more south, the good news might turn into bad or ugly for Pakistan. There will be trade account savings as imports value may fall more than exports. Commodity prices across the board are falling, the savings will not only be in oil. On the same token, exports commodity prices are falling too. On net basis, its beneficial for Pakistan.
The catch is in remittances. Around 50 percent of inward worker remittances come from Saudi Arabia and UAE. With oil to sustainably remain low, remittance flows could see deterioration. Then the FDI and portfolio investment flows may weaken as well. Outflow from T-Bills was only one demonstration of what may be a longer-term phenomenon. Word of caution for investors, it’s time to sit tight and watch.