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Pakistan’s bonds rise to highest level in over a year as IMF tranche nears

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10 months ago

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  • Rise in bonds based on reports of political stability after polls.
  • 2036 dollar-denominated bond gains 2.4 cents. 
  • 2025 maturity lifts to strongest level since May 22. 

KARACHI: Pakistan bonds rose to their highest level in 15 months in hopes that more international financial support is on the way after the country secures the International Monetary Fund’s (IMF) tranche, The News reported Tuesday. 

Optimism about the country’s economy after the tranche has doubled the bonds as they were in late May as the country continues to be gripped by the debt crisis. 

The 2036 dollar-denominated bond rallied the most, gaining 2.4 cents to trade at 57.76 cents on the dollar. The 2025 maturity gained just under 2 cents, lifting it to 82.37 cents on the dollar, its strongest level since May 2022.

The latest leg of the rally, which began last month, was sparked by hopes that an election scheduled for February will provide political stability and enable some economic certainty. An agreement last week to unlock $700 million of IMF funding has also buoyed the country’s bonds.

Meanwhile, the lost some of its trade competitiveness in October as it appreciated against a basket of major trading partners’ currencies, data from the central bank showed. 

The Real Effective Exchange Rate (REER) index, which measures the value of the rupee against a weighted average of several foreign currencies, rose to 98.6 in October from 91.7 in September, according to the State Bank of Pakistan (SBP).

A REER below 100 indicates that the country’s exports are cheaper and imports are more expensive, giving it an edge in international trade. A higher REER means the opposite. The REER increased 7.51% month-on-month in October but declined 2.9% year-on-year when it stood at 101.57.

The Nominal Effective Exchange Rate (NEER) index, which measures the value of the rupee against the same basket of currencies without adjusting for inflation, also increased 6.5% month-on-month in October to 39.18 from 36.79 in September. The NEER fell 21.46% year-on-year from 49.89 in October 2022.

The REER and NEER are calculated using the trade weights of 37 countries, which account for 90% of Pakistan’s trade flows. The rupee continued to rise against the dollar on Monday due to exporters’ dollar sales and optimism about the country’s economy following Pakistan’s deal with the global lender for the next loan tranche.

In the interbank market, the rupee closed at 285.97 to the dollar, compared with the previous close of 286.50. The local unit increased by 0.19% against the dollar during the session. The local currency gained 75 versus the greenback in the open market. 

According to rates released by the Exchange Companies Association of Pakistan (ECAP), the rupee was trading at 287.50 for selling, compared with 288.25 on Friday.

“Despite the drop in forward premiums, exporters are returning to the market to sell dollars, hoping that the rupee will strengthen further in the coming days,” said a currency dealer. The rupee is supported by better supply and an improved economic outlook, the dealer added.

The currency market prediction is that the rupee will rise to approximately 282 per dollar, at which point the SBP will recommence purchasing dollars. The rupee will remain strong due to positive news flows such as multilateral funding and IMF executive board approvals, according to a dealer.

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The PSX has resumed operations, achieving a gain of 970 points.

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The optimistic close at the PSX was propelled by rumors preceding the International Monetary Fund (IMF) executive board meeting on September 25, at which the approval of a $7 billion Extended Fund Facility (EFF) is expected, stated Ahsan Mehanti of Arif Habib Commodities.

Strong economic indicators, such as increasing remittances, escalating exports, and a declining trade deficit, further bolstered investor confidence. Furthermore, the Asian Development Bank’s (ADB) commitment to a $2 billion yearly concessional loan until 2027, along with a robust rupee, significantly contributed to the market’s favorable performance, he stated.

Widespread purchasing at the PSX was noted among blue-chip stocks, with major players like Mari Petroleum (MARI), Engro Fertilizers (EFERT), United Bank Limited (UBL), Meezan Bank Limited (MEBL), and Fauji Fertilizer Company (FFC) recording substantial increases. According to Topline Securities, these stocks collectively resulted in a significant 682-point increase in the index.

Pioneer Cement Limited (PIOC) announced its fiscal year 2024 results, revealing a profits per share (EPS) of Rs 22.79 and a cash dividend of Rs 10 per share. This announcement contributed to the favorable sentiment in the market.

Trading volume surpassed 400.2 million shares, resulting in a total turnover of Rs15.9 billion. Worldcall Telecom Limited (WTL) topped the volume chart, transacting more than 32.2 million shares.

The Large Scale Manufacturing Index (LSMI) demonstrated a year-on-year (YoY) gain of 2.4% in July 2024. This expansion was propelled by multiple critical areas.

Tobacco experienced a significant increase of 90.2%, establishing it as the foremost contributor to the LSMI growth. Conversely, the automotive sector witnessed a substantial increase of 72.0%, indicating robust demand and output.

The transport equipment category experienced an 11.7% increase, signifying robust growth in the manufacturing of transport-related machinery and equipment. The other manufacturing sector experienced a gain of 10.7%, positively impacting the overall LSMI.

Nevertheless, not all industries exhibited strong performance. The leading decliner was the fabricated metal sector, which experienced an 18.4% decrease, signifying a contraction in metal product manufacturing. The electrical equipment industry experienced a substantial decline of 19.4%, indicative of reduced output levels.

In July 2024, the LSMI decreased by 2.1% on a month-on-month (MoM) basis. This fall signifies a minor contraction in manufacturing operations relative to the preceding month, although the favorable year-on-year growth.

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As of August 2024, Pakistan’s current account is in surplus.

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Pakistan’s current account deficit was $161 million as of August 2023, according to figures from the central bank.

The current account deficit for the months of July and August of this year was $171 million, compared to $939 million for the same time in the previous fiscal year.

According to experts, the 40% rise in remittances is the primary cause of the current account surplus.

August saw US$ 2.9 billion in offshore remittances to Pakistan, according to experts.

Comparing July of this year to July of last year, total exports increased by 11.3% YoY to $3.01 billion. In contrast to the $3.08 billion in exports the month before, it decreased by 2.2%.

Compared to the $4.99 billion in imports recorded in July of previous year, total imports increased 12.2% YoY to $5.6 billion. Imports decreased by 1.3% over the previous month.

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Islamic Sukuk Bonds: Government Is Expected To Begin Bond Auction Next Week

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There is now more positive economic news for the people of Pakistan. The government is anticipated to begin the Sukuk Islamic Bond auction next week, after the central bank’s announcement of a large drop in the policy rate.

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