AllianzGI, BlueBay Cut Pakistan Bond Holdings On IMF Uncertainty
Pakistan’s dollar notes emerged as the best performer in emerging markets after Ecuador this year, as Shehbaz Sharif’s return as prime minister after February’s elections reassured investors.
(Bloomberg) -- Bond managers are reducing their exposure to Pakistan’s debt after a rally of almost 25% this year, as the South Asian nation’s history of policy slippage cast a cloud over negotiations for a new International Monetary Fund bailout program.
Pakistan’s dollar notes emerged as the best performer in emerging markets after Ecuador this year, as Shehbaz Sharif’s return as prime minister after February’s elections reassured investors. Sharif’s previous administration had a solid track record of carrying out reforms and his party’s election manifesto — which includes cutting the fiscal deficit and fixing the current account balance — are aligned with the IMF targets, according to Bloomberg Economics.
But investors from Allianz Global Investors to Royal Bank of Canada’s BlueBay Asset Management say Pakistan’s history of failing to meet IMF loan conditions suggest it may be a good time to take some profit. The IMF is set to decide as early as Monday on an initial approval for a $1.1 billion payout from the current program, which is set to end in April. Pakistan plans to seek a new loan of at least $6 billion from the IMF, Bloomberg News had reported.
“Pakistan has come a long way in a short period of time, and still significant risks remains.” said Tim Ash, senior emerging-market sovereign strategist at BlueBay in London. “As ever with the IMF relationship, it will be difficult with lapses on the policy front.”
BlueBay and AllianzGI have trimmed their holdings of Pakistan dollar bonds as they turned more neutral on the debt from bullish. The bonds rallied last year, handing investors a gain of 93%, after the nation succeeded in averting a sovereign default.
Pakistan remains heavily reliant on IMF aid as it faces an average of $26 billion of external financing needs annually through fiscal year 2027. The nation has been bailed out by the IMF 23 times since independence in 1947, among the most globally.
The market has been quite hopeful and “moved ahead” on expectations of a larger package, Jenny Zeng, chief investment officer for Asia-Pacific fixed income at Allianz Global Investors said in an interview. Sharif faces challenges in negotiating a new IMF program and implementing tough reforms after emerging out of the election in a weaker position as he leads a coalition government, she added.
Sharif’s two main allies have said they will support the government only on a case-by-case basis, while his biggest partner Pakistan Peoples Party even declined to join the cabinet.
“Even if a new IMF program is obtained, its ability to resume fiscal and structural reforms could still be hampered,” Zeng said. “We are less optimistic than the market on the outcome, based on the history of policy slippages, debt sustainability concerns and the associate moral hazard risk involved in a large loan program.”
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