Foreigners dumped $269.6mln of debt assets in March

KARACHI: Foreign funds have so far withdrawn $269.6 million of investments from government papers in the current month, the central bank’s data showed on Tuesday, reflecting their lacklustre mood in Pakistan’s debt market that began losing its attraction on coronavirus-dreaded retreat and rate cut prospects.

The major outflows of $238.5 million were recorded in treasury bills (T-bills) that have maturity period of up to one year, while outflows from Pakistan Investment Bonds (PIBs) amounted to $369,000 and equity ($30,763) in nine-day period, translating into cumulative negative net flow of $245.3 million, the State Bank of Pakistan’s (SBP) data showed.

Analysts advocated the perception driven by coronavirus outbreak that makes investors to play safe.

“It’s a coronavirus call,” Saad Hashemy, executive director of BMA Capital of said. “Investors are reducing their exposure.”

But, Hashemy was hopeful of minimal impact on current account position of Pakistan tracking back to stability mode on International Monetary Fund-backed reforms. The central bank is confident about the buffer it has to manage outflows, he said.

Not all thought on the same pattern.

Taxation advisory Tola Associates agreed with the market – anticipating one percent rate cut – that said the carry-trade was problematic as was seen in Egypt case when the reduction in the interest rates triggered capital flight and subsequent balance of payment crisis.

“It was predicted that the multiplying impact and sudden shift in the sentiment of overseas investors may trigger crisis going forward,” the advisory said. “Though the magnitude of outflows is nominal, the hot money outflows are elastic in nature, hence degree of temporariness of hot money funds increases panic and volatility in the interbank/open market, diminishes foreign exchange reserves and accelerates external shock.”

United Kingdom remained on the top position in terms of outflows of $242.7 million in the period under review. US and UAE were on the second and third with repatriation of $16.7 million and $2.3 million, respectively.

The downward trend was in contrast to the market expectation about rollover of investments in the short-term bills. But, this, at the same time, vividly depicted that foreign investors have taken vibes of potential rate cuts in Pakistan.

The benchmark interest rate has been raised 7.5 percent to 13.25 percent since January 2018 as the government was grappling with economic challenges, including inflation spike. In March, consumer inflation scaled back close to the central bank’s annual range of 11 to 12 percent from 14.6 percent in February, increasing a likelihood of soft monetary stance ahead.

Hashemy said the reduction in interest rate might not lure back recoiling foreign funds “as the interest rate still has a widedisparity (compared to peer economies).”

Last year, the government attracted massive foreign investments in debt market in the past couple of months due to attractive, decade-high interest rate, amid whopping current account deficit that now narrowed 70 percent in year. The SBP data showed there were no foreign inflows in PIBs during the nine-day period. Investment in treasury bills stood at $17.9 million, while that in equity $6.4 million.

The capital flight was carried over on Monday when outflows amounted to $62.7 million as opposed to inflows of $2 million. More than 90 percent of maturity was logged in treasury bills during the day. Rupee slipped 2.2 percent against the US dollar on the same day, taking cue from the world stock markets that fell like house of cards following oil and coronavirus shockwaves.

However, foreign investment in government papers kept on positive trajectory between July 2019 and March 9, 2020, the SBP’s data showed. The net flow amounted to $2.8 billion during the period. Outflows during the period amounted to $1.2 billion compared to $4.1 billion of inflows.

The notable inflows of $3.4 billion were in T-bills, followed by equity ($615.9 million) and PIBs ($60.4 million). UK investors poured in whopping $2.5 billion, followed by US ($1.1 billion) and UAE ($154 million) during the period under review.

The divestment is seen as non-event in the long-term with oil fall related contraction impact on import bills would keep the foreign exchange standing unscathed. “It would have been impactful if the fund size had been $6 to 7 billion,” Hashemy said.

Brokerages are pricing in up to five billion dollars in annual relief to the trade balance as a result of oil drop with the benchmark West Texas Intermediate averaging $56 per barrel over the last year. The relief is one-third of the country’s petroleum products’ import bills.