Pakistan awaits ratings upgrade to enter global markets as bond yields drop

The Pakistan government is eagerly awaiting upgrades to its credit ratings by international ratings agencies so it can enter global debt markets. Its economy has shown signs of stability and yields of outstanding bonds have improved considerably, dropping to a three-year low recently.

As the country's economic outlook worsened, bond yields had started going up. In June 2023, the yield on bonds maturing in September 2025 valued at $500 million reached an all-time high of 61.4%.

Bonds maturing in 2026 valued at $1.3 billion touched 51.7%, while bonds maturing in 2027 and 2029 valued at $1.5 billion and $1 billion reached 38.4% and 28.8%, respectively.

The main reason for the spike in yields was the threat of default, drying up of all external support, delay in getting rollovers from friendly countries, the PKR's devaluation, ballooning of current account deficit, and fall in remittances and reserves.

However, as Pakistan's economic outlook improved, yields also started improving. This was largely driven by International Monetary Fund-led economic stabilization policies, which have helped pull the country back from the brink of default and stabilize the economy.

With yields now in single digits, there's a strong likelihood of an upgrade in Pakistan's credit ratings in the near future.

The yield for bonds maturing this year now stand at 7.79% compared to 61.4% in June 2023. Similarly, those maturing in 2026 dropped to 8.50%, 2027 to 9.10%, and 2029 to 9.45%.

Moreover, the yield for bonds maturing in 2031 declined to 9.9%, those in 2036 to 10.47%, and 2051 to 10.83%.

What would it mean for Pakistan?

An upgrade would open the door for Pakistan to borrow from both commercial and international debt markets at more favorable rates, providing essential support to its low foreign exchange reserves.

"With falling yields amidst improving external accounts, the government may roll out new issuance of sukuks or Eurobonds in the global capital markets," Director Research at Topline Securities Shankar Talreja told Nukta.

The government could raise around $1 billion initially, possibly after ratings upgrade and successful IMF review, he said.

In July last year, Moody's Ratings upgraded the country's rating to CAA2, Fitch Ratings upgraded to CCC+, while Standard & Poor's affirmed rating to CCC+.

In January, Federal Minister for Finance and Revenue Muhammad Aurangzeb expressed hope that the positive development in various economic indicators may lead to a sovereign rating upgrade to single B category for the country.

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He said the country's foreign exchange reserves have reached a milestone of $13 billion, sufficient to cover three months of imports.

"This is an important milestone and if all goes well, this is a critical figure for the economy and sovereignty related to a single B category," he said.

"There are many other aspects, which of course rating agencies consider, but I think this is one of the critical factors and we are moving in that direction with very strong remittance flows, IT services exports and diversification of exports etc.," he added.