Pakistan investors brace for thunderbolt as Imran Khan tests army

Karl Lester M Yap & Faseeh Mangi

Pakistan investors are bracing for a sudden jolt as former premier Imran Khan’s showdown with the powerful military, and the government, reaches a tipping point. Warnings of a massive drop in the rupee are flaring up, with some analysts forecasting another 20 per cent decline is possible. Heightened tensions after Khan’s arrest last week may push an IMF’s $6.7 billion bailout further out of reach, with bond managers staring at the specter of a sovereign default. Risks are rapidly increasing for investors as the upheaval is a potent reminder of the nation’s history with coups.

“To be invested in Pakistan means you should be prepared for bigger risks,” said Edwin Gutierrez, head of emerging-market sovereign debt at abrdn, an investor in the nation. “Black swans are a bigger probability.”

Pakistan’s external debt service is estimated at about $22 billion for fiscal year 2024, which begins in July, according to Columbia Threadneedle Investments, about five times the nation’s forex reserves. Bond investors are growing more nervous, with the extra yield they demand to hold Pakistan’s dollar bonds over US Treasuries climbing above 35 percentage points to a record this month. Pakistan’s dollar bonds are trading at distressed levels, with notes due in 2031 quoted at 34 cents on the dollar. 

The rupee slid to a record-low 299 per dollar at close last week and ended at 285.6 on Thursday. The currency has lost about 20 per cent this year, among the worst performers in the world.

The rupee may slump to as low as 350 per dollar in June if Pakistan fails to secure the loan, said Adil Ghaffar, chief executive officer at Premier Financial Services in Karachi. Standard Chartered, meanwhile, is sticking to its call for the rupee to decline to 300 by the middle of the year, according to Farooq Pasha, an economist in Karachi.

“Politics will remain the key risk in the near-term until the elections.”