Country UpdateNovember 20, 2020
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- Ivory Coast
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Market Pricespakistan sovereign
|PKSTAN 5 1/2 10/13/21||101.05||101.55||4.01||378||+14||2021-10-13|
|PKSTAN 5 5/8 12/05/22||102.05||102.55||4.43||418||-9||2022-12-05|
|PKSTAN 8 1/4 04/15/24||108.20||108.70||5.48||517||+0||2024-04-15|
|PKSTAN 8 1/4 09/30/25||109.20||109.70||5.98||557||+1||2025-09-30|
|PKSTAN 6 7/8 12/05/27||103.25||103.75||6.25||568||+2||2027-12-05|
|PKSTAN 7 7/8 03/31/36||102.85||103.35||7.53||662||+3||2036-03-31|
Market Mappakistan sovereign
Scholarly research shows that domestic debt grew as a share of total debt in EMs during the first decade of the century, but defaults on domestic creditors still decreased significantly.
A default to domestic investors usually carries a higher political and economic cost than a default to foreign investors.
Domestic debt is usually concentrated in local financial institutions, such as banks, insurance companies and pension funds.
Fiscal revenues remained almost at the same levels of last year (3.2% of GDP in Q1-FY2020/21) thanks to petroleum levy increases and the rapid economic recovery following the pandemic-induced recession.
Interest payments soared during Q1-FY2020/21, reaching the highest Q1 level of the last thirteen years (1.6% of GDP).
Domestic financing was the main source of borrowing for the government in Q1-FY2020/21, amounting to 0.7% of GDP (or 58% of the fiscal gap).
SELL: We continue to believe that the country presents a poor risk/reward based on its fundamentals.
A positive liquidity context and high yields still favor tactical trades targeting the short end of the PKSTAN curve.
Meanwhile, the yields in the belly and long-end do not sufficiently compensate for worrisome fiscal forecasts and look rich at current prices.
Compared to the benchmark bonds of its rating peers, PKSTAN 27 trades too rich and should continue its latest downtrend.
Protests against Imran Khan’s government are another burden for the valuation of Pakistani bonds in the short term.
The expansive monetary policy of the State Bank of Pakistan has not translated into an increase in credit to the private sector.
The government is issuing fewer Pakistan Investment Bonds than last year while raising funds at longer maturities.
The declining interest rate environment facilitated the lengthening of domestic debt maturity.
Pakistan’s authorities seem to be complying with the IMF’s requests to reduce short-term debt issuance.
The very probably extension of the Debt Service Suspension Initiative (DSSI) at next month's G20 meeting could lead to increased pressure for private participation.
A global approach to the DSSI that involves involuntary exchanges would turn participation into an event of distressed debt exchange.
Any material change in contract terms that implies NPV losses is considered as a default by rating agencies.
Among the list of possible beneficiaries of the DSSI, there are 21 countries at high risk of facing external debt problems and another 4 in already in distress.
Gross financing needs will reach USD 90.6 bn (or 32.5% of GDP) in FY2021.
Domestic debt repayments will eat the biggest chunk, totaling USD 60.5 bn or 21.7% of GDP.
The external funding remains high in FY2021, as foreign loan repayments represent 57% of FX reserves.
We believe Pakistan’s “all-weather friend” China will come to the rescue to cover the external financing needs.
We expect the debt burden will reach an all-time high of 95% of GDP this year (from 87.2% in FY2020).
We understand the rationale of having this safety net behind buying Pakistani sovereigns. However, our view has not ch...
Pressure grows on China, as one of the world's main creditors, to enter the DSSI without restrictions
The terms of China's agreements with emerging or frontier nations are extremely aggressive compared to members of the Paris Club
One issue to keep an eye on is the participation of Chinese state banks in the renegotiations, as these entities hold about 75% of the country's total debt
Chinese authorities have spoken with 20 countries about the DSSI, and it has approved relief for an amount close to USD 3 bn for 10 countries
Angola and Zambia are the countries that most urgently need to address a restructu...
The push to force private sector participation in the G20 Debt Service Suspension Initiative (DSSI) has mostly receded by now.
Rating agencies have recently made explicit that they won’t consider DSSI participation, in itself, as negative for credit ratings.
Recent academic studies show that restructuring debt owed to private creditors has a material long-term adverse effect, but a similar treatment of official debt doesn’t.
Some analysts believe that merely qualifying for the DSSI may have a material adverse effect over credit spreads.
If this is so, and DSSI participation does not lead to private secto...
EMFI Securities expects the primary deficit to reach 1.4% of GDP in FY2021.
This is a more pessimistic forecast than the IMF’s 0.3% expected primary deficit.
We built our fiscal balance projections based on an output growth of 1.6% for FY2021, which is more conservative than the IMF’s forecast (2%) and the government’s projection (2.1%).
Foreign and domestic debt service will eat 43.5% of Pakistan’s total revenues and 50.2% of tax revenues in FY2021.
SELL: Pakistan looks rich on relative value terms and on account of an overextended price recovery that has the bond trading very near pre-COVID...
Internal divisions in the PTI party are intensifying and making it difficult for the PM Khan to implement his agenda.
The government is losing support from other political allies that are key to achieve a majority in the National Assembly.
The fragmentation of the PTI and the diminishing support for the government open the door for another political force to rule over the country: the Pakistani Army.
SELL: Pakistan looks unattractive on relative value terms and we don’t think that the increased political risk is appropriately compensated by higher yields.
36 of the 77 eligible countries have applied for the G20’s Debt Service Suspension Initiative (DSSI).
Chinese debt has grown significantly, but has remained highly opaque. The recently released World Bank dataset is a big step forward in this regard.
Countries that would benefit the most from DSSI owe on average 42% of their 2020-2021 and 41.1% of their 2022-2025 debt service to China.
So far, DSSI only extends for payments scheduled for 2020, but there are many voices calling for an extension to 2021.
To put it bluntly, a program of debt relief or a generalized standstill on official debt would go nowhere wit...
The pandemic changed the monetary policy stance.
The SBP has lowered the policy rate by 525 basis points (bp) so far this year, reaching 8% in May.
The banking system has focused its resources on credit to the government, crowding out private sector credit.
The SBP has started to increase slightly its financing to the government, but it remains low compared to monetary financing in 2018.
Emerging debt continues to be in trouble given current market conditions.
So far debt relief proposals by the G20, IMF and World Bank have only included private creditors on a voluntary basis.
It seems more costly to deal with relief or restructuring of Eurobonds than to advocate for this type of request in bilateral and commercial debt.
Multilateral organizations are also constrained from granting debt relief by its potential impact on their own credit profiles.
Low interest rates and the hunt for yields of the last decade has left broad swaths of EMs overindebted and vulnerable.
The first half of 2020 is not yet over and we already have 3 countries in default.
The recent record of most defaults on Eurobonds on a single year was 4 in 2017, so 2020 is not far from setting new records.
Eurobond restructuring processes are usually among the most complicated due to the variety of holders and the different interests they represent.
Suriname, Zambia, Belize, Sri Lanka and Angola are in the most risk to engross the default-statistic for the year.
May was one of those months that feels like a year. We had a default in Argentina, a tense election in Suriname, a deadly pandemic still spreading around the world, and yet, it was a good month for emerging market debt
Our EMFI Core Index went up for the first time in 6 months. The biggest winners were Argentina, Angola and Ecuador, while Venezuela, Suriname and Sri Lanka were among the negative outliers that went against the general risk-on mood
The macro and fiscal situations deteriorated further for all countries covered, and we chronicled the dramatic economic crash in our Country Reports
We’ve been preparing fo...
For the first time in 68 years, GDP will contract 0.38% in FY2020.
Imports reduction and remittance growth have improved the current account deficit in 3Q of FY2020.
Central Bank's profit transfers improved public finances during in 3Q of FY2020.
Oil imports drop could temporarily break the twin deficit relation in 2020.
Bonds recovered over the past 30 days, but remain 14.1% down. We expect some further recovery, but not full retracement.
As of May 22, 8 countries have at least one USD-denominated sovereign bond trading below 50 cents on the dollar.
The Covid-19 crisis could lead to a new wave of sovereign defaults from prolonged confinements.
We discuss the worst debt restructuring events so far this century.
Argentina 2005 remains at the forefront of these events if we exclude the exceptional cases of countries at war or leaving them.
The countries with the most compromised solvencies that could generate problems with their debt are Angola and somewhat behind, Sri Lanka, El Salvador, Egypt and Pakistan.
A pandemic year was on the cards, the dramatic magnitude of its effects was not.
The global economy is expected to shrink by 3% in 2020, but leading indicators are pointing to a deeper downturn.
Emerging countries with a history of volatile economic growth will show the worst results.
Some economies may experience a period of above-trend growth during the recovery, although the level of GDP will remain, in most cases, below the pre-virus level.
Pakistan is the weakest among the EMFI Countries, in terms of the spread of the virus. Lebanon, Sri Lanka and Barbados are the strongest, with a controlled increase rate and a persistent lockdown.
The countries that we evaluate with the worst economic performance year-to-date are Angola, Venezuela, Lebanon, Barbados, El Salvador, Ecuador, Sri Lanka, Argentina and Suriname.
Since the end of 2019, the local currency has depreciated -70.5% in Venezuela, -52.4% in Lebanon, -43.5% in Argentina and -40% in Suriname.
El Salvador and Argentina launched the most ambitious fiscal program among our sample, which will cost 6% and 5.6...
The safest rung of EM hard-currency sovereign bonds fell on March but has already retraced all their losses.
Mid-quality EMs plunged over March and have risen somehow since, but haven’t fully recovered.
This segment has seen a 320 bps rise in average yield in 2020, going from an average 6.1% yield to 9.3%.
We believe high-yield bonds in our mid-quality group have significant upside if they avert a credit event.
After a dry March, markets are again open for fresh bonds, but only from relatively high-quality issuers.
US stocks rose 12.7% in April, while US investment grade bonds rose 4.6% and EM bonds 4.0%.
Our EMFI Core Index fell 0.9% over the month and is 27.1% down YTD.
The best performers of April were Egypt (+4.7%), Sri Lanka (+4.0%) and Turkey (+3.8%).
The worst performers were Suriname (-26.9%), Lebanon (-14.0%) and El Salvador (-11.3%).
The IMF has approved just over USD 16.0 bn for 61 countries.
Of the 16 countries we follow, 6 have already been granted financing for a combined USD 3.5 bn.
Lebanon and Argentina presented restructuring proposals asking for large debt relief but not offering much adjustment.<...
Pakistan COVID-19 fiscal program (USD 7.6 bn or 2.8% of GDP) is one of the largest among our selected sample of emerging markets, only surpass by Argentina (3% of GDP) and Brazil (7% of GDP).
The primary surplus of 2Q-FY2020 will turn into a deficit of 3.6% of GDP in the FY-2020.
It’s unlikely that the fiscal deficit will be reduced in the next FY-2021 (which starts in July 2020).
The Finance Minister just said that the next budget will also include expenditures measures to tackle the coronavirus pandemic.
We expect Pakistan's gross public debt to increase from 77.3% of GDP in the 2Q-FY2020 to 87.4% in Jun...
On April 15, the G20 agreed on a standstill for bilateral debt service during 2020. Nonetheless, the agreement only applies to IDA-eligible countries. The suspension will be NPV-neutral and will involve repayment over 4 years, including a 1-year grace period.
Multilaterals haven’t found a way to implement a similar standstill. In fact, Fitch Ratings warned them that joining in on the G20 standstill could result in rating downgrades if not appropriately compensated by shareholder countries.
On aggregate, official creditors account for almost 90% of the debt of low-income, and 60% of that of lower middle-income countries, b...
Two weeks ago, we singled out some early calls for a generalized global debt moratorium in our Global Strategy Viewpoint: Force Majeure. The idea has gained significant traction and is becoming one of the main themes in economic and financial discussion.
While we don’t think a generalized moratorium on commercial bonded debt is likely to succeed, investors should be aware that it is a growing theme and bondholders will probably be under increased pressure to accept attempts at restructuring bond terms.
There are some indications that China is a significant roadblock for the IMF-World Bank initiative for a bilateral debt m...
The YTM of PKSTAN 8.25 2024 and PKSTAN 8.25 2025 bonds doubled MoM, separating from the rest of the curve by 242 and 192 bps respectively.
PKSTAN 8.25 2024 closed on monday at 89.06 cents per dollar and PKSTAN 8.25 2025 closed at 88.10 cents per dollar, with YTMs of 11.70% and 11.20%.
Despite the fact that some of Pakistan bonds present CACs with three mechanisms to modify reserved matters, not all titles in the country have this clause.
The PKSTAN 8.25 2024, with a high yield, no CAC and the same coupon as the bond due in 2025, represents an interesting opportunity in the curve.
Pakistan could save USD 2,414 mn in oil import bill compared to the previous FY, due to global oil prices drop.
According to our estimates, if Brent prices grow 1% annually, Pakistan’s oil import bill will increase 0.6% annually, taking into account just the price effect.
Exports of goods could decrease by USD 1,428 mn (6%) in FY2020 due to weaker external demand.
However, Pakistan’s trade deficit could improve by 4%, since the reduction of oil imports bill could offset the exports decrease.
The fact that Pakistan’s migrant workers are mostly skilled makes remittances less vulnerable to global econ...
The COVID-19 crisis is raising a difficult question of public policy for emerging market economies with low fiscal space, which have to reconcile economic and social policy with debt service.
The relation between liquidity and solvency problems is not straight-forward: the COVID-19 shock, which presents liquidity challenges first and foremost, can unearth underlying solvency problems and can also turn liquidity problems into solvency ones if improperly managed.
We’re already seeing some early calls for an international debt holiday to exempt countries from paying during the COVID-19 crisis. Multilateral organizations are ...
The current crisis will translate into twin demand and supply shocks, with an oil price war on top of it.
The demand shock driven by declines in the world’s main trading partners will particularly affect emerging markets which are characterized by low diversification of exports and production.
Supply chains around the world have been disrupted by factory closures, first in China and now in Europe and the US.
The markets most exposed to a potential slowdown are the major commodity exporters: Venezuela, Ecuador, Angola and the markets most reliant on Chinese and US tourism.
In most EMFI countries the tourism act...
Our EMFI Core Index has fallen 27.6% year-to-date (YTD), while Our EMFI Expanded Index has fallen 19.2%. The last two weeks have been particularly bad, with consecutive 10% declines.
Unsurprisingly, countries heavily reliant on oil have suffered the most. Among our 34-country group, almost every oil-reliant one has fallen more than the 18.3% median.
The second thing that jumps to the eye is that the riskier countries have fared proportionally worse than relatively safer countries, when excluding oil-dependent countries.
We’re also seeing several countries crossing the 10% yield threshold, usually associated with dis...
The outbreak of the Coronavirus, as well as the “oil price war” between Saudi Arabia and Russia have triggered almost complete certainty that a global recession is coming over the next quarter.
Some economists are expecting a 2-quarter rolling recession, but there is potential for the downturn to extend further if the virus reemerges after activity is unfrozen.
Emerging market debt is taking a beating in 2020 so far. The countries we cover registered a median 14.3% fall year-to-date, with the worst performer doing as bad as 60.3% down (Ecuador) and 38.5% down (Angola).
We compare indicators on 4 major categori...
February was a bad month for EM debt, as the market went into risk-off mode pushing bonds to backtrack on the gains made over the previous two months. 11 out of the 15 countries in our EMFI Core Index fell on the month, while the weighted index itself fell 5.8%, retracing below December levels.
Our Expanded Index ex. Core confirms February’s sell-off, registering declines in 21 out of 25 countries and an aggregated fall of 0.9%. Nonetheless, this fall is significantly below that of our EMFI Core Index.
Our selection of countries is clearly biased towards some large and risky high-yielders, which translates to an expectabl...
Since FY 2016-17, Pakistan has consistently missed its tax revenue target.
Tax collection dropped 0.4% in FY 2018-19, driven by direct taxes and sales taxes decrease.
Pakistan is heavily dependent on indirect taxes, specifically on sales taxes.
Consolidated tax collection slightly improved 0.2 pp to reach 5.6% of GDP in the first half of FY:2019-20.
Provincial taxation remained weak, while federal collection recorded a robust growth.
We believe that the government will not be able to substantially improve consolidated tax revenues in the medium term.
Although the current government is taking measures to ...
GDP growth slowed to 3.3% in 2019, a 2.2 pp decline compared to the previous year. The slowdown was led by the stabilization measures undertaken by the authorities to address the twin deficits.
After a significant deterioration of the current account deficit between 2016 and 2018, (+5.2pp), the external position improved considerably in 2019. It declined to 5.4% of GDP in 2019, from 7% in 2018. This improvement was mainly driven by lower imports (imports of goods declined by 7.4% while services fell by 14.9%).
The outlook remains positive in 2020, but with potential risks that could undermine the economic reforms undertaken by ...
On December 2, Moody’s upgraded Pakistan’s credit rating outlook from negative to stable due to the IMF assistance program, which has helped stabilize the economy. A statement explains that the balance of payments dynamics will continue to improve, supported by policy adjustments and currency flexibility, as well as decreased external vulnerability risks.
Moody's expects Pakistan's current account deficit to continue narrowing in the current and next fiscal year (ending June of each year), averaging around 2.2% of GDP, from more than 6% in fiscal 2018 (the year ending June 2018).
On November 21, the US Acting Assistant Secretary for South and Central Asia, Alice Wells warned that the China-Pakistan Economic Corridor (CPEC) would increase Pakistan’s debt-burden. Washington said that the corridor is going to take a heavy toll on the economy at the time of repayments.
The CPEC was originally valued at USD 46 bn. During 2016 and 2017, the volume of investment grew to USD 62 bn after China approved additional financing.
On November 22, China and Pakistan reply urging the US “to sift fact from fiction" before questioning their bilateral program.
Today, the Minister of Economic Affairs, Hammad Azhar, announced through his Twitter account that the World Bank (WB) has restored budget support to Pakistan due to the country’s greater economic stability. Loans had been suspended in 2017 due to increased macroeconomic imbalances.
Pakistan has registered positive results in the external accounts and for the first time in four years it registered a current account surplus in October. The current account balance stood at USD 99 mn in October, an improvement compared to September’s USD 284 mn deficit. This result was mainly explained by the restoration of confidence in the ...
On November 1st, anti-government protesters took the streets of Pakistan’s capital demanding the resignation of Prime Minister Imran Khan. The demonstrations were led by Maulana Fazlur Rehman, a Muslim cleric backed by Pakistan’s main opposition parties, primarily the Pakistan People’s Party (PPP) and the Pakistan Muslim League (PML).
The opposition argue that the 2018 presidential elections were unfair because the army favored Imran Khan's party, Pakistan Tehreek-e-Insaf (PTI), which won the elections. However, the opposition parties only agree on this point, as the centrist parties do not support Rehman's ...
On October 30th, the government and reached an agreement to postpone the condition of showing the identity card known as "Computer National Identity Card" (CNIC) in sales and purchases until January 31st, 2020.
Due to the “Extended Fund Facility” agreement reached with the IMF, the Federal Revenue Board (FBR) seeks to broaden the tax base by requiring showing the CNIC in goods purchases above PK 50,000 (USD 321). With this measure, the authorities seek to track tax evaders by documenting business-to-business and natural persons transactions.
Prime Minister Khan said on Monday, October 28 that traders must ...
This Friday, October 18, the Financial Action Task Force (FATF) will decide on whether to keep or remove Pakistan from the gray list or if it will be included with Iran and North Korea in the blacklist.
A delegation sent to China where the FATF meeting will be held, headed by the Minister of Economic Affairs, Hammad Azhar, said Pakistan has made positive progress on 20 of 27 points.
However, on October 7, the Asia Pacific Group (APG), an organization associated with FATF, published a report that reviews Pakistan's progress in financing terrorism and money laundering. The report notes that Pakistan has only implemented...
On September 20, the IMF staff concluded a visit by to the country. The visit aim to made a balance of economic developments since the sign of the Extended Fund Facility (EFF) on May 12. Another visit is scheduled for the end of October, as part of the EFF agreement first revision.
“The near-term macroeconomic outlook is broadly unchanged from the time of the program approval, with growth projected at 2.4 percent in FY2019/20, inflation expected to decline in the coming months, and the current account adjusting more rapidly than anticipated. However, domestic and international risks remain, and structural economic challenges pe...
This week, from September 16 to 20, a delegation from the International Monetary Fund (IMF) headed by its director for the Middle East and Central Asia, Jihad Azour, visits the country to review the progress of the reforms within the framework of the Extended Fund Facility (EFF). In these meetings the government top officials and the IMF delegation will discuss about tax collection and fiscal deficit, among other topics.
On the other hand, on September 21 the Prime Minister Imran Khan will travel to the United States to participate in the United Nations General Assembly. A high-level delegation from Pakistan, including the prime mini...
On August 30, technical meetings took place between Pakistan and India in their first diplomatic approach after India revoked of its Constitution the 370 article that granted special rights to Kashmir, the Muslim-majority state which extends across both countries. This meeting was to finalize the draft agreement for operationalization of the Kartarpur Sahib corridor.
The Prime Minister of Pakistan, Imran Khan has pledged that his country would not initiate any military conflict with India, following the August 16 statement of Indian defense minister's, Rajnath Singh that India may change its ‘no first use’ nuclear pol...
The Asia-Pacific Group (APG) has kept Pakistan on the Watchlist in terrorist financing and money laundering (known as the gray list). This action was the result of non-compliance with 32 of the 40 “compliance parameters” and 10 of 11 “effectiveness parameters”. This decision was communicated after the APG meeting in Canberra, on the morning of Friday 23rd.
Pakistan has been under the scanner of the Financial Action Task Force (FATF) since June 2018, when it was put on the gray list for the risks of terrorist financing and money laundering, after an evaluation of their financial system and law enforcement mecha...
According to CNN, Pakistan has announced it will downgrade diplomatic relations and suspend bilateral trade with India after New Delhi stripped the disputed state of Jammu and Kashmir of its special status.
Therefore, India's High Commissioner will also be removed from the country, Pakistan's Ministry of Foreign Affairs said in a statement Wednesday. It added that Islamabad will not send its own ambassador to New Delhi.
Indian-controlled Kashmir remains in lockdown amid a communications blackout, with landline connections, internet and mobile coverage all suspended. Tens of thousands of additional Indian troops have als...
Regarding economics, currently the most worrying issue is the remarkable growth of Pakistan’s external debt, which, according to IMF figures, went from 58.9% of GDP in 2011 to 72.1% in 2018. Also, last year Pakistan had an inflation of 8.4% and a strong deceleration in its GDP is expected for this year, going from 5.2% in 2018 to 2.9%.
The IMF, seeking to support the reduction of Pakistan economic vulnerabilities and to generate “balanced and sustainable” growth in the country, announced on July 3 2019, through a press release, a 39 month extended arrangement under the Extended Fund Facility (EFF) for Pa...