LONDON, July 14 (Reuters) – Investors have returned to hoarding bonds in Pakistan and Argentina following cash injections and optimism about multilateral support, but the two nations have only gotten enough help to get through to elections in the fall, experts said.
The rally in international bonds issued by the two countries has intensified in the past two weeks, with Pakistani bond yields soaring above 45% and Argentina’s nearing 30% year-to-date , making them some of the best performing countries in their markets. asset class, according to JPMorgan data.
But the boost in bonds belies the difficulties both nations face in implementing major reforms once new leaders arrive after the upcoming elections.
“It’s not enough to solve the country’s problems, it’s not enough,” Carlos de Sousa, emerging markets portfolio manager at Vontobel Asset Management, said of Pakistan’s recent funding gains, adding that Argentina’s challenges are also immense.
Pakistan’s last-minute agreement to $3 billion of the International Monetary Fund (IMF), after months of talks it obtained official approval this week. Saudi Arabia and the United Arab Emirates followed with $2 billion and $1 billion infusions
This fresh cash means Pakistan is unlikely to default on its debt in the next six to nine months, de Sousa said. elections in the politically volatile country should be held at the beginning of November.
Reserves remain precariously low at $9.8 billion as of July 7, only about two months of imports. JPMorgan sets its external financing needs at more than 30,000 million dollars.
Even in the short term, Pakistan will have to keep on top of difficult reforms, such as allowing its currency to move with some freedom.
“Pakistan has a history of missing fiscal targets and the risk of fiscal slippage is high in an election year,” JPMorgan said in a note.
The real challenge for Pakistan, which is still recovering financially and physically from last year devastating floodsit comes after contentious elections, when it will likely need to secure a longer-term IMF program.
This is likely to require punitive and unpopular cuts in food and fuel subsidies, increases in electricity prices, and relaxation of controls on the rupee.
“It gives them some space to get through the political moment they’re going through right now,” said Roberto H. Sifon Arevalo, head of global sovereign and international public finance ratings at S&P Global, adding that “it’s still a political situation. very complicated”.
Reflecting the challenges ahead, the rally in Pakistani bonds was heavily skewed towards shorter maturities.
DEEP ROOT PROBLEMS
In Argentina, infamous for its chaotic cycles of debt and default, the problems are even more entrenched. The second largest economy in South America is teetering on the brink of recession, with inflation exceeding 100% and a currency that continues to depreciate in official and parallel markets.
International reserves are at record lows, and the nation is struggling to keep up in $44 billion IMF program, a loan guaranteed last year to refinance a failed 2018 bailout.
Battling an acute dollar shortage, in June it paid off part of the $2.7 billion owed to the Washington-based lender with Chinese yuan from a Beijing swap line.
The earnings on Argentina’s bonds, investors said, reflected the IMF’s commitment to Buenos Aires, representing about 28% of the fund’s total lending.
The first taste of what is to come will be Argentina’s mandatory primary election on August 13 before the October general election.
“The result doesn’t translate into who will sit in the presidential palace, but it will show the candidates that they are performing well,” said Jimena Blanco, chief analyst at Verisk Maplecroft.
Investors and pollsters said tough times could force the leaders of Pakistan and Argentina to consider necessary tax reforms.
“The Peronist government faces a high probability of losing the elections,” said Alejandro Catterberg, director of the Buenos Aires-based polling firm Poliarquia. “The disappointment and frustration among Argentines is at the highest level in the last two decades.”
Peronist candidate and current economy Minister Sergio Massa He will face an array of rivals, including a coalition of centrist Horacio Rodríguez Larreta and conservative Patricia Bullrich, and the main far-right contender Javier Milei.
Whoever wins, reality won’t leave much choice in policymaking, said Shamaila Khan, head of fixed income for emerging markets and Asia Pacific at UBS Asset Management.
“They’ve depleted reserves to a point where they don’t really have a lot of options going forward.”
Reporting by Libby George and Jorgelina do Rosario, additional reporting by Rodrigo Campos, editing by Karin Strohecker and Toby Chopra
Our standards: The Thomson Reuters Trust Principles.
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