Investors avoid Pakistani bonds due to a growing risk of default

Investors are on high alert for Pakistan to go bankrupt, following Sri Lanka, as the south Asian nation struggles with rising commodity prices and more stringent credit standards.

According to Bloomberg data, the price of Pakistan’s foreign bonds, which are slated to mature in 2024, 2025, and 2026, respectively, is trading at around 71, 65, and 63 cents on the dollar.

Investors’ worries about the strains bearing on the developing economy are reflected in the fact that the country’s debt has among the worst performance of any debt issued by emerging market countries this year.

Since Russia’s invasion of Ukraine in February, there has been a sharp rise in global oil and food prices, which has fueled inflation and increased Pakistan’s trade imbalance, depleting its reserves. A liquidity crisis is imminent as the country’s foreign exchange reserves, which are only enough to last another two months, are down to approximately $9 billion.

“Going into the Ukraine crisis, Pakistan wasn’t in a good place to start with,” said Gareth Leather, senior economist at Capital Economics. “The explosion in commodity prices has led to a rapid deterioration in its current account and rising government spending.”

The country’s bonds continue to have a lesser discount than those of other emerging markets. This is because it’s anticipated that Pakistan would be able to avoid defaulting this year with the help of an IMF bailout and bilateral funding support.

Bonds maturing in 2026 for Ghana, which, like Pakistan, is struggling with rising prices and looking to the IMF for assistance, are currently trading at about 68 cents on the dollar. Sri Lankan bonds, which went into default in May, are currently selling for approximately 32 cents.