The government's short-term floating debt policy has hampered the liquidity of the long-term debt market, besides restricting development of bench-mark bonds. According to State Bank of Pakistan's first quarterly report for FY14 issued on Friday security concerns and political uncertainty are some other important deterrents to foreign inflows in Pakistan's debt market.
The report said that capital inflows to a country can be categorised as FDI, portfolio investment; external loans, remittances and external investment in debt securities. A rise in interest rates in the host country, is said to attract a higher stream of foreign capital inflows, however, this relationship does not always hold. FDI and portfolio investment display a negative relationship, whereas remittances and external debt are not sensitive to the interest rate movements. This leaves foreign investment in local debt securities (bond market) as the only category that merits consideration, while analysing the impact of interest rate movements, it added.
Unlike the experience of other emerging economies that have a noticeable share of international investment in local currency bond markets, Pakistan receives only sparse external inflows into its domestic debt securities. To put things into perspective, FY11 witnessed the highest foreign inflows in T-bills amounting to $212 million, which constituted a mere 0.9 percent of the T-bills stock on end-June 2011. On the other hand foreign investment in PIBs has never crossed even $100 million benchmark in a year, the report pointed out.
The data on international investment in National Saving Schemes (NSS) is not available, but anecdotal evidence indicates only nominal foreign participation in these schemes. According to SBP, this sluggishness can be traced to a number of issues and interest rate differential, strong economic fundamentals including stable exchange rate, inflation and extent of bond market development are important factors underpinning foreign inflows into local debt markets.
The performance of Pakistan's economy on these counts, however, has remained unsatisfactory. In the period of last ten years, exchange rate has experienced various bouts of volatility, whereas inflation has mostly remained in double digits. "As regards the development of the bond market, while the size of the domestic debt market has increased with government's growing dependence on internal resources for financing the fiscal deficit, the composition of domestic debt has shifted towards short-term floating debt. This not only hampers the liquidity of the long-term debt market, but also restricts development of bench-mark bonds," the report said.
This is in sharp contrast to the situation in other emerging markets, which largely depend on long-term fix rate bonds for the financing of fiscal deficits. This can also be seen from the lower sovereign ratings assigned to Pakistan by the international rating agencies eg, Moody's vis-a-vis other countries. Resultantly, despite much attractive yields on Pakistan's long term bonds compared to other emerging economies, the country is not able to attract external inflows. In fact, our in-house estimates indicate that despite the large depreciation of Rupee against US dollar, investment in Pakistan's long term bonds is a profitable option for international investors; however, the numerous issues have stymied this avenue of foreign inflows for the country.
"In this scenario this can be safely concluded that a rise in the domestic interest rates is not likely to boost capital inflows to the domestic bond market. On the other hand, this can discourage the external inflows to the equity market, by negatively impacting the performance of domestic stock market," the report said.
Comments
Comments are closed.