Pakistan poised to evade short-term default after IMF funding: report

• IMF's board is expected to take up Pakistan's matter on Monday. 
• "I expect next 12 months to be challenging with elections looming," analyst says.
• Economist says political uncertainties will pose a major risk for Pakistani assets.”

With all eyes on the executive committee’s meeting of the International Monetary Fund (IMF) scheduled to be held tomorrow (Monday), cash-strapped Pakistan is confident to evade a near-term default, Bloomberg reported.

The leadership expects the Washington-based lender to resume the month-long stalled $6 billion bailout programme; however, a rally in the nation’s assets may fizzle out amid escalating political tensions.

According to Columbia Threadneedle Investments, Tellimer Limited and Natixis SA predictions, Pakistan will win a loan approval from the IMF board when it meets on Monday, “paving the way for the release of $1.2 billion in immediate funds.”

However, amid ongoing political turmoil in the country, it is expected that the two-day later focus will shift to PTI Chairperson Imran Khan’s court hearing as he battles a string of legal troubles.

“I do think the bulk of the market rally is already in the price,” said Eng Tat Low, an emerging-market sovereign analyst at Columbia Threadneedle in Singapore. “I expect the next 12 months to be challenging with the general elections looming. The risk of worsening political backdrop is definitely still considerable and elevated, and is a risk that is unlikely to dissipate anytime soon.”

It should be noted that Pakistan’s dollar bonds have been the top performers in emerging markets in August after Belarus. Meanwhile, the rupee also soared above its peers as investors cheer the prospect of IMF funds.

However, the development on the political front can put fragile financial stability at risk as supporters of Imran Khan stage protests.

“The political uncertainties will persist with speculations on early elections,” said Junyu Tan, an economist at Natixis in Singapore. “This will pose a major risk for Pakistani assets.”

Mixed performance

Pakistan’s dollar bonds mixed performance highlights the country’s “rocky path ahead”. Notes due in December were indicated at about 94 cents on the dollar on Friday from a low of 85 cents in July, as investors grow more confident the debt will be repaid. Meanwhile, bonds due in 2031 were still quoted at below 60 cents on the dollar in the distressed territory.

Columbia Threadneedle expects the prices of Pakistan bonds to be range-bound in the next 12 months. “The dollar bonds have returned almost 16% to investors this month”, according to a Bloomberg index. Its stocks have rallied by 6%.

According to London-based research firm Tellimer, the Pakistani rupee — which surged 8% this month to 220.52 per US dollar on Friday — will most likely weaken to 240 by the end of 2022.

“Pakistan’s government will need to deliver on its reform promises to set its debt and reserves on a sustainable path,” said Patrick Curran, a senior economist at Tellier. “Any deviation from its reform targets, however minor, could shatter market confidence and send the rupee back into a tailspin.”

‘Tumultuous’ track record

Pakistan’s track record with the IMF can be described as “tumultuous”. The former PTI-led government secured a bailout programme in 2019 only to have it stall several times due to Islamabad’s failure to meet some loan conditions.

Prime Minister Shehbaz Sharif-led government will get a massive boost with the resumption of the programme as it would help avert what would be the second default in Asia this year after Sri Lanka.

Islamabad needs to pay at least $3 billion to service debt in the first half of fiscal 2023, according to Bloomberg Economics. With the IMF loan paving the way for more financing, the State Bank of Pakistan expects foreign-exchange reserves to rise to about $16 billion this fiscal year from $7.8 billion.

Elections must be held by the second half of 2023, although Khan has called for early polls as he challenges the legitimacy of the government.

“Until there is a new civilian government with a fresh electoral mandate, it is very hard to see a consistent path for economic policy, and therefore a sustained or smooth rally,” said Hasnain Malik, head of EM equity strategy at Tellimer in Dubai.