Following the country’s terrible floods and subsequent official warnings that some debt payments might have to be halted, investment firm JPMorgan found it justifiable to drop Pakistani bonds to just a third of face value.
Even though Pakistan’s finances were already tight before this month’s floods, the cost of repairing the damage and helping those affected has fueled fears the country is now defaulting.
Ishaq Dar, the new finance minister, said last week that he would seek a payment deferral on some $27 billion of non-Paris Club debt, most of which is owed to China, but that he would not would not pursue actual cancellations.
As well as receiving about $4 billion in loans and post-flood aid from organizations such as the World Bank and the United Nations, Pakistan participates in an IMF program.
But as it stands, that’s $7.9 billion in foreign exchange reserves that only last about a month of essential imports.
Pakistan’s debt and fiscal dynamics “signal growing solvency concerns,” according to a note released Wednesday by JPMorgan analysts.
“Current government bond prices are likely justified by external political/fiscal risks related to flooding, the possibility of a debt moratorium and their implications for the IMF program as well as foreign exchange liquidity.”
This month, the value of these bonds has fallen to around 33 to 35 cents on the dollar, leaving them at only a third of their face value and roughly in line with other countries considered at risk of default, such as El Salvador, Ghana and Ecuador.
In addition to setting out a “hypothetical” scenario in which payments on these international market notes, also known as Eurobonds, were delayed for two years, JPMorgan said that “the market is undoubtedly pricing a risk of external debt restructuring”.
By the end of 2024, the government would save a total of $7.5 billion under this scenario, which would also see a one-third reduction in bond “coupons,” according to JPMorgan. However, they warned that China may not be willing to accept the same terms on its loans.
Concerns mainly relate to domestic debt.
Domestic debt accounts for about two-thirds of Pakistan’s public debt portfolio, which currently accounts for almost 80% of GDP, and almost 90% of all interest payments are made domestically.
Nominal gross public debt is expected to decline from 78.9% of GDP in FY2022 to 60.7% of GDP in 2027, according to an IMF assessment earlier this month that Pakistan’s debt is sustainable .