Why Pakistan bonds are rallying?

[Naveed Yaseen]

RECORDER REPORT
KARACHI (March 02 2009): Rising political temperature in Pakistan after the disqualification of Sharif Brothers have no impact whatsoever on the bond values which are continuing their bullish trend.

Despite the fact that 11-month old PPP-led government is facing the most serious political crisis erupted by the court ruling, investors are bullish on government issued bonds both local currency (Pakistan Investment Bonds) and foreign currency (Eurobonds), according to a leading research analyst, Mohammed Sohail.

Though there are slightly different reasons for the rally in local and foreign currency bonds, the fact of the matter is it is portraying a picture that Pakistan economy is on the path of recovery. Plummeting global commodity prices along with fiscal discipline has helped local economy in the recent past, the analyst argues.

He pointed out that the price of most traded benchmark 10-year Rupee denominated PIB maturing in August 2018 has rallied 12% in last two weeks. This issue which was quoted at Rs85 two weeks back is now available at Rs95. In yield terms it is now at yield to maturity (YTM) of 12.9% versus 14.9% in the auction held couple of weeks back thereby posting a decline of almost 200 basis points.

The main buying activity occurred after the recently conducted T-Bill auction by the central bank in which cut-off yields came down surprisingly by 90-100 bps. The huge quantum of liquidity coupled with expectations of a massive cut in discount rate by SBP has forced bankers to make money by buying these bonds. The signals coming from recently concluded IMF meetings also endorses the expectations that local interest rate will come down drastically. That is why the benchmark 6-months KIBOR is down 270 bps from 15.7% two months back to 13% now, according to him.

Local bankers are actively speculating and trading in local currency government papers amid huge liquidity in the interbank market. With very slow growth in credit, thanks to bankers risk aversion, treasurers have no other options but to punt on the fact that inflation will come down. No doubt year on year inflation as depicted by CPI (consumer price index) may decline sharply after March 2009 (12-15% expected) mainly due to base affect, regulators must observe critically the rising speculative activities in government papers.

Another positive news is that there has been some improvement in Pakistan dollar bond prices. Although S&P increases Pakistan rating by one notch to CCC plus after the IMF tranche, the rating is still many notches below the investment grade.

Yield on Pak Eurobond maturing in 2016 and 2017 touched a high of 28% and 26% at the beginning of January 2009 and is now hovering between 21-23% respectively. Stability in forex reserves after IMF program and timely re-payment of principal on %-year bond maturing on February 19, 2009 has improved investors confidence in the paying ability of government of Pakistan. And the recent political uncertainty has yet not affected the rising trend of these dollar denominated bonds as there are expectations that Pakistan rating may further improve in case import cover continue to rise, analyst Sohail concludes.

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