Foreigners gravitate to high-return govt bonds


As a reflection of growing confidence in the economy, foreign investors parked $104 million in long-term Pakistan Investment Bonds (PIBs) during the last three months (November-January) of FY21.

Before emergence of Covid-19 pandemic, significant foreign inflows were noticed in short-term treasury bills, but since then massive outflows were witnessed following drastic cut in interest rates.

However, this time the pattern appears to have changed since foreigners are increasingly opting to invest in high-yielding long-term bonds compared to short-term government securities — mainly market treasury bills (MTBs).

In FY20 most of the foreign investments were made in MTBs ranging from 3 to 12 months.

The State Bank of Pakistan (SBP) in its report issued on Friday revealed that the PIBs attracted $104.86m till the end of the current month (Jan 29 is the last working day for banks).

The change was noted in November FY21 when foreign investors started buying PIBs and the momentum picked up pace over the next two months. The foreigners snapped up PIBs worth $27m in January alone.

PIBs attract $104m in last three months

While some bankers and analysts said it was a breakthrough for the country that the confidence has built up again like it was before the Covid-19 pandemic, but others said the return on PIBs is very high compared to other bonds in the global market.

In FY20, the government and the SBP promoted domestic bonds and provided risk-free exit for foreign investments. The investors are allowed to take out the entire amount without objection from the central bank and it proved correct when the investors took out most of their investments up to $3.4bn within two months after the pandemic hit the country in March 2020.

“The recent development that created attraction for the foreign investment in the domestic bonds was current account surplus with reasonable foreign exchange reserves while exchange rate also remained stable,” said Samiullah Tariq, head of research and development at Pak-Kuwait Investment Company.

The yield on PIBs is very high — almost 10pc, he added. The yield on 10-year PIB in the last auction was 9.99pc. The profit rate is highly attractive for foreigners as they cannot get such lucrative returns in developed and developing economies badly hit by the second wave of Covid-19.

Many bankers believe that the quick outflow of foreign investments from domestic bonds was the result of drastic cuts in interest rates to support the economic activities following emergence of coronavirus.

From mid-March to May 2020, the SBP slashed the interest rate from 13.25pc to 7pc — a reduction of 6.25 percentage points — in a matter of months to pump maximum liquidity in the slowing economy in the wake of lockdowns to check the spread of Covid-19.

However, financial sector experts said the outflow of foreign investment was also due to large cut in profit rates as the investors lost their interest.


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