Foreigners are once again seen gradually increasing investments in the government debt securities like T-bills and Pakistan Investment Bonds (PIBs) amid surge in rate of profit on the securities, return of stability in rupee-dollar parity and Islamabad resuming the International Monetary Fund’s (IMF) loan programme soon.

Although the volume of net foreign investment in the securities stood nominal at $17 million in the first 20 days of the ongoing month of March, the number suggests gradually return of foreign investment into Pakistan’s debt market.

Similarly, the net divestment by investors has reduced to $83 million in the past nine months (July 1, 2020 to Mar 21, 2021) compared to net divestment worth $162 million in seven months (July 1, 2020 to February 2, 2021). The net divestment by stood at $266 million in five months (Jul-Nov 2020), according to the State Bank of Pakistan (SBP).

Earlier, foreign investors made an aggressive investment of over $3.5 billion in government securities from July 2019 to February 2020 following Pakistan’s agreement to the stringent IMF bailout package worth $6 billion. They, however, aggressively pulled most part of the investment in the wake of Covid-19 outbreak in Pakistan in February 2020. They aggressive outflow of over $3 billion during the four-month period (Mar-Jun 2020) had badly shaken the rupee against the dollar.

After quite a long time, the situation has gradually turned in favour of Pakistan as suggested by the number particularly for the first 20 days of March. The investors have partly invested more in long-term securities eg PIBs, which were not largely in focus during the July 2019 to Feb 2020 period.

“Foreign investors may stage comeback in government debt securities like T-bills and PIBs if (rupee-dollar) exchange rate remains stable. The increase in rate of returns on investment in the securities and Pakistan resuming IMF loan programme would pave the way for foreign investors returning to Pakistan debt market,” BMA Capital Executive Director Saad Hashemy said while talking to The Express Tribune.

The July to date breakdown suggests, foreign investors parked $617 million in T-bills and PIBs and withdrew $700 million in the past nine months. Accordingly, they have withdrawn a net $83 million from the securities.

The gradual increase in rate of profit on the securities and return of stability in rupee against the dollar in the middle of the Covid-19 pandemic helped the country reinvite foreign investors’ interest into the government debt instruments.

To recall, the rupee maintained near one-year high at Rs155.85 to the US dollar on Monday. Earlier, it recovered around 7.5% in the past seven-month period to date since it hit all-time low of Rs168.43 on August 26, 2020.

The rate of profit on three-year PIBs has increased to 9.31% on March 22 compared to 7.53% at the end of June 2020 in the secondary market. Similarly, the rate of profit on five-year PIB surged to 9.84% compared to 8.11% at end of June 2020, Hashemy said.

Similarly, the rate of return on three to 12-month T-bills and other longer tenure PIBs have surged sharply in recent months.

Hashemy said the early reopening of Pakistan from lockdown, growth in economic activities and higher inflows than outflows have supported the rupee in having recovered notably in the past seven months. Similarly, the profit rates have surged on the securities in the secondary market despite the real interest rate remaining negative as the central bank wanted to support economic growth during the ongoing pandemic.

“Pakistan’s debt market remains an attractive place for foreign investors, as rate of return on such securities in their own countries remain next to nil since even before the Covid-19 outbreak the world over,” he said.

He said foreign investors were reinvesting in the debt securities on the outlook the benchmark interest rate would gradually increase to 9% or above in the next one-and-half to two years.

The central bank has said it would increase the rate gradually when it would feel need for that. “I guess the central bank would make first rate increase of 25-50 basis points in the next bi-monthly monetary policy statement due for May 2021,” he said.

“Anyhow, the interest rate may not return to March 2020 high of 13.25%. Accordingly foreign investment might not reach back to the aggressive position in the government securities of $3.5 billion which they took during Jul-Feb FY20.”

Published in The Express Tribune, March 24th, 2021.

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