SBP says foreign investors pull out $471.7m from debt market

Foreign investors pulled out $471.7 million from Pakistan's debt market in five months as lower interest rates and Covid resurgence weighed down their investment appetite, the central bank's data showed.

Analysts said the continued hot money outflows from the local fixed income market indicates that the low-yielding government debt has become less attractive for foreigners with the State Bank of Pakistan (SBP) having slashed policy rates by 625 basis points to 7 percent since mid-March.

"The withdrawal could be because rates are close to all-time lows and are not lucrative enough for investors," said Saad Hashemy, executive director at BMA Capital. "Increase in rates will result in losses and maturing investment is not being rolled over as foreign investment in the local bond market started late last year."

However, the government securities such as market treasury bills and Pakistan investment bonds received a combined total inflow of $205.6 million during July 1 to November 25, according to the SBP.

The SBP's data showed that foreigners became net sellers of $266.1 million worth of the treasury bills and investment bonds during the period under review.

Analysts said the central bank seems reluctant to tighten monetary policy till the first quarter of next year to help revive lockdown-battered economic growth. They expect a gradual 1 to 2 percent rise in interest rates till June.

They said average 7 percent yields on the treasury bills and 8-10 percent on the investment bonds are still attractive for the foreign investors when compared with negative and near-zero interest rates in the United States and Europe.

The stability in the exchange rate, after appreciation in rupee value versus the US dollar, has not propelled the foreign investors to buy Pakistan's debt.

Foreigners purchased $90.9 million worth of local currency bonds between July 1 and November 25, while they divested $36 million from the shortterm instruments in the same period, according to the SBP's figures. "We saw outflows only from the treasury bills in November, but foreigners invested both in treasury-bills and the investment bonds during the month," said another analyst.

"This trend shows foreign investors can step up buying of the rupee-denominated bonds and such inflows to the country should resume once the interest rates are started going up. It also depends on a faster economic recovery in the world and in the country following the positive news on the vaccine progress,"

The SBP said activities in the local currency debt securities largely drove the portfolio investment, with net portfolio inflows surging to $2.1 billion during July-February, and then reversing to a net outflow of $2.7 billion in the March-June period.

"It is important to highlight that the reversal in capital flows in this latter period was not unique to Pakistan. The outbreak of the Covid-19 pandemic, specifically in advanced economies, led to a global flight of capital from emerging and developing economies," it said in a latest report.

Although the country is not able to attract foreign exchange inflows into the local currency debt market, the central bank's foreign exchange reserves reached $13.4 billion as of November 20, compared with $12.1 billion as of June-end.

The increase in the reserves is supported by surplus in the current account, higher remittances, and increased inflows from the international financial institutions.

Meanwhile, In line with market expectations, the State Bank of Pakistan (SBP) kept the interest rate unchanged at 7% for the next two months.

The decision taken by the SBP Monetary Policy Committee (MPC) on Monday comes as the country is reeling from the effects of the Covid-19 pandemic.

Traditionally, the SBP revises its policy rate up or down, or keeps it unchanged in relation to the inflation reading and economic activities. Low inflation mainly leads to a reduction in the policy rate for ramping up economic activities and vice versa. The rate is left unchanged at a higher level to tame inflation or on the lower side to support economic growth.

However, the world is quite different today where the pandemic is dominating decisionmaking in all walks of life and everything else has become less important.

In addition to this, Pakistan has invited the International Monetary Fund (IMF) to complete its second review of the country's economy under the $6 billion loan programme, which has been on hold since the Covid19 outbreak in Pakistan in February.