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Pakistan Bondholders Stay Wary as Floods Weigh on Outlook

·2 min read

(Bloomberg) -- Pakistan’s dollar bonds are failing to rebound after the nation resumed its deal with the International Monetary Fund as devastating floods drag on the nation’s economic outlook.

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The South Asian country’s dollar bonds due in 2031 and 2051 hovered around lows last seen in mid-July, according to data compiled by Bloomberg. The bonds have struggled to recover despite the disbursal of a $1.16 billion loan in late August, which helped the nation to avert default as political turmoil and deadly flooding threatened the economy.

“Markets are waiting for a better understanding of the flood fallout and to see whether the likely increase to the current account will be offset by fresh donor support,” said Patrick Curran, a senior economist at Tellimer Ltd. “Bonds are trading below recovery value, so there’s plenty of upside, but with political uncertainty complicating the reform story and the floods causing uncertainty on the economic outlook it will take some time for that upside to be realized.”

While the nation’s resumed $6.5 billion loan program with the IMF eased fear of a default, millions of acres of agricultural land have been destroyed in record rainfall. Bonds due in 2031 edged slightly higher to 48.5 cents, after touching the lowest since mid-July on Wednesday, according to data compiled by Bloomberg. Pakistan’s dollar bonds due in 2024, meantime, fell about 0.2 cents to 62.3 cents on the US dollar.

The nation’s currency fell about 0.9% against the dollar on Thursday to 234.20.

Pakistan’s government has already slashed its economic growth projections by more than half due to the floods, expecting growth to come in at 2.3%, compared to a target of 5% growth in June. Officials also agreed with the IMF to increase a gasoline tax to 50 rupees per liter from 37.5 rupees by early 2023.

“For Pakistan, I think the story is still very much predicated on whether the government will stay committed to the reforms laid out by the IMF,” said Eng Tat Low, emerging-market sovereign analyst at Columbia Threadneedle in Singapore. “The impact of the floods is mostly priced in the bonds now.”

The gasoline tax hike will likely add to price pressures, Bloomberg Intelligence economist Ankur Shukla said in a note Wednesday, forecasting that inflation will climb to 27.5% on average in the year ending in June 2023.

(Adds quote in second last para, updates pricing throughout)

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