World’s biggest bond investors are sticking with Pakistan

Bloomberg reports that most of the major inventors in Pakistani bonds are holding and not selling the bonds. This is a sign of confidence in the country. So contrary to the blasphemy of Hillary Clinton, and the claptrap emanating from the 5th column of the Pakistani media.

April 23 (Bloomberg) — Some of the world’s biggest bond investors are sticking with Pakistan even as the government struggles to combat al-Qaeda and Taliban militants along the border with Afghanistan.

ING Groep NV, Erste Sparinvest KAG and HSBC Holdings Plc, which oversee more than $800 billion in assets, are maintaining holdings of Pakistan’s dollar bonds as almost $13 billion in assistance from the International Monetary Fund and aid pledges help the country stave off default. The nation’s bonds have returned 35 percent this year, the best performance in Asia among dollar debt indexes compiled by London-based HSBC.

“Broadly, we believe that it definitely doesn’t look as bleak for Pakistan,” said Joel Kim, who helps oversee $433 billion globally as head of Asian debt at ING Investment Management in Hong Kong. “They’ve passed the worst point. The IMF money has helped stabilize things.”

A $7.6 billion bailout from the Washington-based lender in November stabilized Pakistan’s currency after it plunged 22 percent last year and boosted foreign-exchange reserves to $7.8 billion on April 4 from $3.5 billion in October, according to data compiled by the central bank. The South Asian nation won promises this month for $5.3 billion in aid from more than 20 countries to help shore up its economy and combat al-Qaeda and Taliban militants.

Cost of Terrorism

Terrorism has cost Pakistan $35 billion in economic losses and damage to infrastructure, according to a statement given to reporters by President Asif Ali Zardari’s aide on April 17. More than 3,500 terrorist incidents have occurred since 2007, killing an average of 84 people per month this year, the aide said.

“The financial package for Pakistan in November should help the country muddle through, but the political risk in the country remains extremely high,” said Peter Marber, the New York-based head of emerging-market debt and currencies at HSBC Global Asset Management, which oversees $370 billion in funds worldwide. “We have maintained a market weighting. We have no plans to increase exposure.”

U.S. Secretary of State Hillary Clinton said yesterday that Pakistan’s government is “abdicating” to the Taliban and other extremists. The U.S. is developing performance measures for Pakistan that will be linked to American aid, Clinton told the House Foreign Affairs Committee.

Pakistan’s 6.875 percent dollar bond maturing in June 2017 yielded 18.62 percent yesterday, versus a record high of 26.30 percent on Nov. 3, 2008, according to data compiled by Bloomberg. The price has climbed to 52 cents on the dollar, from as low as 35 cents last year.

Political Concerns

Standard & Poor’s, which rates Pakistan’s foreign-currency debt CCC+ or seven levels below investment grade, said international investors will stay away because political concerns distract policy makers from fixing the government’s budget and current account deficits.

The IMF forecasts the economy will expand 2.5 percent in the 12 months ending June 30, the slowest pace in eight years, after growing at an average annual pace of 6.8 percent since 2002. Foreign investment fell to $5.19 billion in the year ending June 30, 2008, from a record $8.43 billion a year earlier, government data show.

The government aims to collect 1.25 trillion rupees ($15.5 billion) in taxes in the fiscal year, from 1.04 trillion rupees a year ago, to narrow the budget deficit to 4.3 percent of gross domestic product. Central bank Governor Salim Raza said Jan. 31 that meeting the tax collection target may be a challenge as economic growth slows.

“The fiscal and external positions have continued to deteriorate,” said Agost Benard, S&P’s Singapore-based associate director.

Investors Return

Pakistani business officials say the perception of political risk is overstated and international investors are starting to return.

“There is now very early signs of portfolio investment starting to come back,” Asad Umar, the president of Karachi- based Engro Chemical Pakistan Ltd., said in an interview yesterday in New York. “Pakistan is going to come out of it earlier than the rest of the globe.”

The Karachi stock index is up 27 percent this year, compared with a 12 percent gain in MSCI’s emerging-market stock index. The rupee, which declined 22 percent against the dollar last year, the second-worst performer in Asia, fell 1.8 percent this year.

“International portfolio investment has been returning,” U.S. Ambassador to Pakistan Anne Patterson said in an interview on Bloomberg TV yesterday. “The stock market is beginning to recover.”

Bond Risk

The extra yield investors demand to own Pakistan bonds has tumbled 7.35 percentage points to 14.87 percentage points after reaching a seven-year high on Dec. 19, according to JPMorgan Chase & Co. Still, the country’s bond risk remains high. Five- year credit default swaps based on Pakistan’s bonds show investors need to pay $2.2 million annually to protect $10 million of Pakistan’s debt for five years, the third-highest in the world, according to CMA Datavision.

“We’re’ still holding the dollar bonds,” said Anton Hauser, a fund manager who oversees the equivalent of $1.1 billion in emerging-market debt at Vienna-based Erste Sparinvest, including Pakistani bonds due in 2017. “We’re neutral on Pakistan. We expect that they will muddle through and they will not default on their bonds.”