Pakistan Just Passed a Credibility Test

Tresmark: A few weeks ago, we asked whether a global family office looking at Pakistan would actually invest. This week, sovereign bond investors answered with nearly $6 bn on the table

Pakistan raised a record $3 bn, with effective yields of around 7.75% and 8.25% (5.5 & 10 year), slightly more expensive than Egypt, which is similarly rated. This may look expensive at first, but perhaps less so considering where junk risk premiums are, recently escalated geopolitical uncertainty, renewed concerns around the Fed and higher yielding US bonds.

The more interesting question is why investors were willing to lend Pakistan this much money, and why for this long.

“Three Years of Rebuilding Credibility”
Pakistan has consistently honoured its external commitments through a fairly difficult period. Earlier this year it repaid a $1.4 bn Eurobond, then it returned UAE’s $2 bn deposits, while in July it repaid around $1.4 bn of Chinese commercial debt even though the anticipated refinancing has yet to come through.
For a bond investor, that history matters.

Pakistan was able to sell $1.25bn of 10 year paper. The 10 year tenor needs special mention. Price tells us what investors demanded for Pakistan risk. Tenor tells us how much credibility they attach.

Impact on PKR

The additional Dollar inflow provides another cushion for reserves and should also help the Rupee psychologically. This reinforces our earlier view that exporters should keep selling in the forward market, with preferred tenors being the 4 and 6 month periods.

Diversified and more sustainable source of funding

For years, external financing has relied heavily on the IMF, multilaterals, China, Saudi Arabia, UAE and commercial rollovers. International bond markets are now back in that mix at a time when Pakistan’s gross external debt servicing requirement for FY27 is around $21.5 billion.

Much of that is expected to roll over or refinance, so having more funding options clearly helps. It also gives Pakistan greater flexibility in managing reserves and reduces some of the dependence on any single source of external financing.

Would the Family Office Invest Today?

Pakistan still carries plenty of risk. External financing requirements remain large, growth has been anaemic, reforms have some distance to go, and borrowing Dollars at around 8% tells us exactly how international markets continue to price that risk.

The conversation, though, has moved a long way in three years. Back then, markets were debating whether Pakistan would default. Today, investors are deciding what return they need to lend Pakistan money for ten years.

Fed threat matters for Pakistan

Fed Chair Warsh’s tough stance on combating inflation as a priority and yesterday’s much stronger-than-expected US jobs report have brought the Fed hike risk firmly back into play, reminding markets that the next move in US rates may be “higher.” And this does not bode well for emerging countries as liquidity dries up and risk premiums climb higher

The Long End Is Still the Problem

The bigger concern remains at the long end, with the US 30-year yield again around 5.25% as investors demand greater compensation for inflation, deficits and an increasingly heavy supply of government debt. Central banks may control the short end of the curve, but the long end is increasingly being priced by a bond market that appears far less forgiving. And this is hardly just a US problem, with similar pressures appearing in Japan and parts of Europe.