FINWIRE®

Pakistan bond market outlook remains intact

August 20th, 2007

Pakistan’s domestic bonds yields and spread (between 2 and 10 year bond yields) by and large remain intact despite jittery politics and slide in international bond yield.

An analysis by the KASB Securities Ltd, a local securities company, in participation from Merrill Lynch suggested that the market still expects strong macroeconomic growth in years to follow.

It has not panicked about the potential impact of domestic politics on the country’s economic growth.

Yield curve remains flat

Despite the increased volatility of domestic politics and a significant slide in the international bond markets, yield curve (a measure of risk aversion) has flattened further even compared to 6 months ago.

The spread between 2 and 10 year bonds which stood at a 100bp in December 2006 has narrowed to 70bp currently. It is suggested that the market anticipates a robust growth outlook in the years to follow.

Pakistan’s international bond yields

In comparison, Pakistan’s international bond yields depicted nightmarish volatility over the last couple of months, primarily on account of jittery politics and international bad press.

However it is expected that the volatility in Eurobonds is exaggerated by the relative illiquidity of the instrument and by any standard a 400bp spread over US Treasury (UST) is not justified.

“We believe this should recover and the spread of Pak Eurobond over UST should settle down at not more than 250bp, Muzammil Aslam an economist at KASB said. This can be validated from domestic bond market price movements”,

Macroeconomic glimpse

The country is expected to achieve 6.9% GDP growth in FY08 driven by robust domestic consumption. With exports coming in at less than 12% of GDP, Pakistan remains largely uncorrelated to any global slowdown, in particular a slowdown in the US.

In addition, its external sector is less vulnerable to the current global credit squeeze, primarily due to lower exposure to foreign portfolio investment compared to regional peers.

As a result, it is expected Pak Rupee exchange rate, foreign exchange reserves and the external account will remain resilient to changes in global growth and credit outlook.

Due to robust domestic consumption in the country, in the recent policy statement SBP raised the discount rate.

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