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Bloomberg’s Report on Pakistan is Misleading

February 16, 2016

Bloomberg report says, “Pakistan’s Risk Surges to One-Year High Amid Global Turmoil”
It is absurd and damaging country’s credibility. It conveys wrong message to the world maligning Pakistan’s trustworthiness.
Pakistan’s 5-year Credit Default Swap (CDS) surged about 5-weeks ago. The article did not mention surging of CDS in Asian Emerging Markets and its cause, but unfortunately singled out Pakistan. CDS does not include the funding cost. Basically it is a benchmark for the investors providing them guideline to calculate risk on investing in country’s bond.
The cause of CDS sharp up-move is due to impact of Global events, as China’s slowdown, Oil prices slump and FED Monetary Policy Stance. The US Rate Hike is surely matter of big concern as US Rate Hike attracts investors to US Market, which is considered safe place to invest.
This is why market has witnessed huge sell off of Bonds and Stocks of Emerging Market. Estimates are that Global Investors have pulled nearly USD 735 Billion of which USD 676 Billion was withdrawal from China.
Break-up of Pakistan’s Outstanding Debt, of the Total Debt and Liability has reached Rs 20.706 Trillion of which External Debt is Rs 6.946 Trillion and the remaining amount is Domestic Debt.
It is lack of market knowledge and understanding, which is misguiding the readers. Though true that the Debt has surged at a very fast pace breaching the Fiscal Limit and has reached an alarming level, but Pakistan is comfortably placed and there is no risk of default in Short to Medium Term Period.
The cause of surge in Domestic Debt is due to Revenue/Income Shortfall and because of continues fall in Exports, Ever Rising Circular Debt (Electricity & Commodity) and Government Borrowings/Investment in Government Paper to meet Fiscal Deficit Target.     Bloomberg report and data highlighting risk involved against Domestic Debt with External Debt is misguiding and is mixture of confusion, as it lacks clarity.
To meet its annual external financing of nearly USD 4 Billion Government Borrows fund through Donor agencies and Euro & Sukuk (Islamic) Bonds, as Privatization dried up and has nothing much to offer. Is has already arranged USD 500 Million to cover its Bond Maturity in March.
Two other big ticket items of Government of Pakistan (GOP) are Pakistan Investment Bond (PIB) maturity and Treasury Bills to meet annual Deficit Financing of Rs 1.3 Trillion (estimated).
In 2016, PIB maturating amounts is roughly around Rs 1.45 Trillion including coupon and out of Total T/Bills Rs 2.796 Trillion outstanding. If we subtract 1-year T/Bills amount of Rs 306 Billion of the last 3-auction of 2016 the T/Bills outstanding amount is Rs 2.490 Trillion. By adding up the two, Non-Bank & Bank Holdings of GOP Securities overall total outstanding amount is Rs 3.94 Trillion.
Apart from Direct Government Borrowing the other source of Domestic funding comes from SBP’s daily Open Market Operation (OMO) amount which is Rs 1.263 Trillion and funds generated trough International Reserves /Foreign Currency Liquidity (Swaps) equivalent of USD 1.65 Billion.
Since, Pakistan’s Fx Reserves is comfortable above USD 20 Billion, therefore, there is Zero or no risk of Foreign Currency Default in the near future, as Government has sufficient funds to meets any eventuality.
Neither there is risk of Domestic Default unless all sources of funding is plugged or exhausted, which is will never happen. I can safely say that Pakistan is comfortable placed for next 2-3 years, but this does not mean our Economic woes are over. Oil price slide and Remittances is major supporter and boon for the Economy. But the economy needs to generate genuine income and cannot survive on loans and grants forever.
(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction) 

Pakistan’s Risk Surges to One-Year High Amid Global Turmoil

Faseeh Mangi FaseehMangi

Divya Patil

February 15, 2016 — 3:00 AM PKTUpdated on February 15, 2016 — 9:20 PM PKT

Bets are rising that Pakistan will default on its debt just as it starts to revive investor interest with a reduction in terrorist attacks.

Credit default swaps protecting the nation’s debt against non-payment for five years surged 56 basis points last week to 620 points amid the global market sell-off, according to data compiled by Bloomberg. That’s the highest since January 2015 and the steepest jump after Greece, Venezuela and Portugal among more than 50 sovereigns tracked by Bloomberg.

About 40 percent of Pakistan’s outstanding debt — both local and foreign — is due to mature in 2016, according to data compiled by Bloomberg. That’s roughly $45 billion, of which about 4.3 trillion rupees ($41 billion) is in local currency.

Prime Minister Nawaz Sharif has worked to make Pakistan more investor-friendly since winning a $6.6 billion International Monetary Fund loan in 2013 to avert an external payments crisis. The economy is forecast to grow 4.5 percent, an eight-year high, as a crackdown on militant strongholds helps reduce deaths from terrorist attacks.

“Pakistan’s high level of public debt, with a large portion financed through short-term instruments, does make the sovereign’s ability to meet their financing needs more sensitive to market conditions,” Mervyn Tang, lead analyst for Pakistan at Fitch Ratings Ltd., said by e-mail.

Right now, he said, there’s not much reason to panic. Pakistan’s external liabilities are “relatively modest,” foreign-currency reserves have risen, existing IMF funding will help meet maturing loans over the next two years and Chinese investment in an economic corridor is on its way, Tang said.

“Improving growth prospects, lower inflation and smaller budget deficit should help to underpin investor confidence, particularly the domestic investor base,” Tang said.

Pakistan has just $4 billion of external debt coming due in 2016 and “does not face any difficulty in respect of its debt servicing obligations,” the Finance Ministry said on Monday in an e-mailed response to questions. The government doesn’t “feel any cause for concern with regards to refinancing its domestic debt,” it said.

Public debt risk indicators such as short-term debt as share of total obligations have come down over the past two years, the CDS is on a downward trajectory compared with 2008, and Sharif’s administration has successfully tapped the capital markets, the Finance Ministry said. Pakistan has a medium risk of default over five years, according to Bloomberg assessments.

Pakistan is committed to successfully implement its IMF macroeconomic stability program, the Finance Ministry said in a statement Feb. 1. Sharif’s administration has a “quite good” chance of completing the program, IMF mission chief Harald Finger said last month.

Since Sharif took the IMF loan, Pakistan’s debt due by end-2016 has jumped about 79 percent. He’s also facing resistance in meeting IMF demands to privatize state-owned companies, leading to a strike this month at national carrier Pakistan International Airlines Corp.

The bulk of this year’s debt, some 2.4 trillion rupees ($23 billion), is due between July and September, and repayments will get tougher if borrowing costs rise more. The spread between Pakistan’s 10-year sovereign bond and similar-maturity U.S. Treasuries touched a one-year high on Thursday.

If Pakistan’s debt servicing costs rise, Sharif doesn’t have much room to maneuver. Already about 77 percent of the country’s 13 trillion rupees ($124 billion) budget for the year through June 30 is earmarked for interest and principal repayment on loans.

Pakistan’s external requirement accounts for 19 percent of the nation’s $21 billion in foreign-exchange holdings.

That stockpile, however, isn’t airtight. While it increased by more than 55 percent last year — the steepest rise in Asia — more than half consists of debt and grants that could leave the country quickly if global risk appetite worsens. Outflows would weaken the rupee, a currency that is estimated by the IMF to be as much as 20 percent overvaluedeven though it’s proved remarkably stable amid the recent market turmoil.

“The obligations maturing during the year are fully covered by reserves as well as the planned build up during the year,” Ehtasham Rashid, Director General at the Debt Policy Coordination Office of the Finance Ministry, said by e-mail. “It is fallacious to claim that Pakistan has built reserves on the back of short-term borrowings.”

Investors should expect volatility in bonds and pressure on the rupee this year, according to Mustafa Pasha, head of investments at Lakson Investments Ltd., which manages $200 million of Pakistani stocks and bonds.

While the plunge in oil prices helped the government last year, predicting the outlook would be like “reading the tea leaves,” he said by phone from Karachi.

Another worry, as ever in Pakistan, is political stability. The military has ruled the country for most of the time since independence in 1947, and General Raheel Sharif — no relation to the prime minister — has boosted the army’s image with a campaign to root out terrorists who massacred 134 children in 2014.

While Raheel Sharif has said he plans to retire when his term ends in November, the risk of political upheaval is ever present. Pakistan has the 10th highest political risk score among more than 120 countries in the Economist Intelligence Unit ranking, worse than Egypt and Iran.

(A previous version of this story was corrected to show smaller outstanding external debt)

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