Foreigners cut down on govt bonds, securities on weak rupee

KARACHI: Foreign investors pulled out $334.20 million from the local currency debt securities so far this fiscal year, which is higher than the inflows of $241.82 million witnessed in such papers, the central bank data showed on Tuesday.

Analysts said foreign investors were cautious about buying Pakistan’s treasuries and bonds due to sharp currency depreciation and falling yields.

Foreign investors poured $151.473 million into Treasury Bills and $90.344 million in Pakistan Investment Bonds (PIBs) as of December 27, 2021. They pulled out $256.670 million from T-bills and $77.491 million from PIBs. Foreigners were net sellers of $92.38 million.

“Investors take currency risk when attempting to carry trades,” said analyst Fahad Rauf at Ismail Iqbal Securities. “Rupee has witnessed a lot of volatility which can wipe out returns in a quick time. So both equity and debt markets are not witnessing any major (foreign) interest,” he added.

“On the other hand, we have been able to fetch money in Eurobonds which does not have a currency risk. Apart from that, at times of global uncertainty, emerging market debt gets less attention.”

Inflows in T-bills and PIBs amounted to $3.22 million in December, while outflows came at $22.52 million. These papers had a net outflow of $19.30 million.

Initially, rupee stability and high T-bills and PIBs’ yields led foreigners to invest in short-term and long-term papers.

However, weakening of the rupee and continual decline in yields on these papers in the money market amid expectations of steady interest rates in the coming policy reviews lessened foreign investors’ interest in Pakistan.

The rupee has fallen by 11 percent against the dollar in 2021 to date.

The yields on three-month and six-month T-bills stand at 10 percent, respectively, while on 12-month paper the yield is 11 percent. The yields on three-year, five-year, and 10-year PIBs are at 11 percent.

The State Bank of Pakistan (SBP) has already said it sees no need to change its near-term interest rates settings as the goal of mildly positive real interest rates on a forward-looking basis nears to be achieved.

The central bank wants to pause interest rate hikes to sustain economic recovery after making a sharp increase of 275 basis points in three moves since September.

The SBP raised the policy rate by 100 basis points to 9.75 percent this week to counter double-digit inflation and the large current account deficit.

Mohammed Sohail, CEO at Topline Securities said foreign investors in the local currency bond market need higher interest rates and stable currency. “In the case of Pakistan I think this may happen once the IMF programme resumes as that may bring stability in rupee,” Sohail added.