23 May 2023 (MLN). Amid dire economic challenges and despite a chorus of skepticism, there is a certain group of resilient investors who believe the country is not headed for default anytime soon.
Pakistan will not default on its sovereign debt because the country’s commercial debt obligations that will not be written off are too low, with $3 billion due in the next 12 months.
This much debt can be managed with careful management of the current account balance and support from friendly countries, says KTrade’s latest report, We Towards a Growing Pakistan.
Geopolitics has become the most important factor to understand in navigating the financial markets. This is true not only for Pakistan but for all investments.
“Our engagements and meetings with world leaders and policymakers lead us to believe that Pakistan will receive sufficient support to avoid a severe sovereign default,” the report said.
Both Pakistani equities and sovereign bonds have now become attractive asset classes and are likely to generate multi-pocket returns for investors. Not surprisingly, many large business groups are buying back shares in their own companies, according to KTrade chairman Ali Farid Khuwaja.
“We recognize the magnitude of the economic challenges, which is why we are the most bullish on gold in over a year. However, we now believe that pessimism is already reflected in most asset prices,” he added.
While the latest measures to control the current account are not long-term fixes, we believe they will be sufficient to manage the liquidity problem, the report noted.
This will give the government time to finalize investment terms with countries such as the UAE, Qatar and most importantly China and Saudi Arabia, it said.
Clearly, valuations in fixed income and equity markets are cheap, indicating that the market expects a Pakistani default. The stock trades at 3x PE, compared to a historical average of 7x, and CDS spreads are the widest in the world.
“We understand that bullish sentiment on stocks is a deeply controversial call at this time. Even domestic analysts have started to raise the possibility of default,” the report says.
The report states that Pakistan has no solvency problem. External debt is only 24% of GDP ($85 billion), and commercial debt is only 7% of total debt. The market debt is only 7.8 billion dollars.
At the same time, the report suggested the purchasing power of the citizens through the business of restaurants in the food streets of Karachi, Lahore and Islamabad, which is enough to see that there are no domestic disturbances.
Additionally, the changing world order over the past 12 months has seen some massive changes in the global political landscape. The decline of the US and the move to a multipolar world has long been called by many.
Reading global geopolitical trends, as well as government initiatives on foreign policy and financial management, make this resilient group of investors confident that Pakistan will not default.
Copyright Mettis Link News