Amid declining yields, is it an optimal time for Pakistan to issue Eurobonds?

But first, what exactly are Eurobonds? A Eurobond is a fixed-income debt instrument issued by a government and denominated in a currency other than the issuer's local currency. It allows an issuer to raise funds through debt. Eurobonds are sold to investors in the international market.

Is this a good time for Pakistan to issue more Eurobonds?

The declining yields raise questions about whether it's an opportune time for the government to issue Eurobonds in the global market and what rates it could expect.

The lower yields indicate a reduced risk of default and could enhance the government's ability to raise additional funds from international markets under better conditions. There are two primary factors that suggest it may indeed be an optimal time for the issuance.

Pakistan's external sector

Pakistan's capital account typifies a low level of foreign investment. Nevertheless, the expanding central bank reserves reached $10.7 billion as of September 27, and the current account surplus of $75 million in August demonstrates a better growth trajectory that will sustain financial inflows and lessen the balance-of-payments crisis.

Pakistan's external debt and liabilities soared to $130.5bn by June, up from $130.4bn by the end of December 2023. Its total external debt stayed at $78.2bn, up 1.6% compared to the same period last year.

During the latest analysts' briefing held by the State Bank of Pakistan (SBP), Governor Jameel Ahmed shared that the country has to repay foreign debt amounting to $5.8bn by March 2025.

Pakistan owes significant debts to various international organizations and funds, including the Paris Club ($6.4bn), multilateral donors ($39.2bn), the IMF ($8.4bn), and international bonds, including Eurobonds and Sukuks ($6.8bn).

The country's track record of timely Eurobond repayments reflects its fiscal management capabilities. Its financial standing is bolstered by increased foreign investment and effective currency management by the SBP, particularly through efforts to combat smuggling and illicit currency trade.

Looking ahead, the stability of the Pakistani rupee and these bonds will hinge on Pakistan's adherence to the reforms outlined by the IMF.

Improved credit ratings

Since Fitch Ratings recently upgraded the country's credit rating to CCC+ from CCC and S&P Global Ratings maintained its current CCC+ rating, it is a good time for Pakistan to re-enter the global securities capital market to raise financing at competitive rates.

“The yields will continue to fall to single digits each passing month. Credit ratings should improve in the next quarters, as will currency stability and increased dollar inflows" following the release of the first tranche of $1bn by the IMF under the EFF, AAH Soomro, an independent economic and investment analyst, told Nukta.

"Though yields may not return to initial coupon rates due to the growth in credit risk in recent years, I expect them to fall by another 0.5–1%. 2051 maturity may hover near 10sh nevertheless," he added.

Geo-political risks

While the country's economic outlook has improved, geo-political tensions could pose risks.

Tensions that disrupt oil supplies can lead to sharp increases in oil prices, often causing investors to re-evaluate the investment risk. In such cases, the bond yields might rise due to heightened uncertainty and inflation expectations.

"If the conflict between Iran and Israel causes oil prices to rise above the $90-mark, I anticipate that bond yields could exceed 10% again, as there would be increased pressure on trade terms, currency stability, and economic reforms," Soomro commented.

With the issuance of financial instruments like Eurobonds, Pakistan International Sukuk, Panda bonds, and others, Pakistan is becoming increasingly prominent in the global capital market. The SBP reserve profile would benefit from the debt obtained through these bonds, which would also assist in stabilizing Pakistan's external position.