Investors shun Pakistani bonds on rising default threat

Investors shun Pakistani bonds on rising default threat

Investors are on alert for Pakistan to follow Sri Lanka into default as the south Asian country struggles with soaring commodity prices and tighter credit conditions.

Pakistan’s foreign bonds due to mature in 2024, 2025 and 2026 are trading firmly in distressed territory, at about 71, 65 and 63 cents on the dollar, respectively, according to Bloomberg data.

The country’s debt has been among the worst performing this year of any issued by emerging market countries, signalling investors’ concerns over the pressures weighing on the developing economy.

The surge in global energy and food prices since Russia’s invasion of Ukraine in February has fed inflation and caused Pakistan’s trade deficit to widen, draining its reserves. With its foreign exchange reserves dwindling to about $9bn, enough to last another two months, a liquidity crisis is looming.

“Going into the Ukraine crisis, Pakistan wasn’t in a good place to start with,” said Gareth Leather, senior economist at Capital Economics. “The explosion in commodity prices has led to a rapid deterioration in its current account and rising government spending.”

The discount on the country’s bonds remains smaller than for other emerging markets. This is due to expectations that an IMF bailout coupled with bilateral financing support may help Pakistan