Investment bank JPMorgan has called the slump in Pakistan’s bonds to just a third of their face value justified, following the country’s devastating floods and recent warnings by officials that some debt payments may need to be suspended.
Pakistan’s finances were already stained before this month’s floods,but the cost of repairing the damage and providing support for those affected have raised fears that it may now default.
New Finance Minister Ishaq Dar told Reuters last week that he would ask for payments on some $27 billion worth of non-Paris Club debt largely owed to China to be pushed back, although he would not pursue actual write-offs.
Pakistan is in an IMF programme and set to receive around $4 billion in post-flood aid and loans from the likes of the World Bank and the United Nations.
But as it stands its $7.9 billion of foreign exchange reserves covers key imports for barely a month.
“Pakistan’s debt and fiscal dynamics flag rising solvency concerns,” JPMorgan’s analysts wrote in a note on Wednesday.
“Political/fiscal, flood-related external risks, and the possibility of a debt moratorium and their implications on the IMF programme as well as FX liquidity likely justify current sovereign bond prices.”
Those bonds have plunged to around 33-35 cents on the dollar this month which leaves them at just a third of their face value and broadly in line with other countries seen as at risk of default such El Salvador, Ghana and Ecuador.
“The market is certainly pricing a risk of an external debt restructuring,” JPMorgan said, also laying out a “hypothetical” scenario where payments on those international market bonds, also known as Eurobonds, were suspended for two years.
The scenario, which would also see a one-third reduction in bond “coupons”, would result in a cumulative saving of $7.5 billion for the government by the end of 2024, JPMorgan said although they also cautioned that China might not be willing to accept the same kind of terms on its loans.
The main concerns revolve around domestic debt though.
Nearly two-thirds of Pakistan’s public debt stock, which is now close to 80% of GDP, is domestic and domestic interest payments account for nearly 90% of overall interest payments.
Earlier this month, the IMF judged Pakistan’s debt as sustainable with nominal gross public debt forecast to drop from 78.9% of GDP in the 2022 fiscal year to 60.7% of GDP in 2027.
