Investment bank JPMorgan has called the slump in Pakistan’s bonds to just a third of their face value justified, following the country’s devastating floods and recent warnings by officials that some debt payments may need to be suspended.
“Pakistan’s debt and fiscal dynamics flag rising solvency concerns,” JPMorgan’s analysts wrote in a note on Wednesday.
“Political/fiscal, flood-related external risks, and possibility of a debt moratorium – and their implications on the IMF programme as well as FX liquidity – likely justify current sovereign bond prices.”
Those bonds have plunged to around 33-35 cents on the dollar this month which leaves them at just a third of their face value and broadly in line with other countries seen as at risk of default such El Salvador, Ghana and Ecuador.
“The market is certainly pricing a risk of an external debt restructuring,” JPMorgan said, also laying out a “hypothetical” scenario where payments on those international market bonds, also known as Eurobonds, were suspended for two years.
The scenario, which would also see a one-third reduction in bond “coupons”, would result in a cumulative saving of $7.5 billion for the government by the end of 2024, JPMorgan said although they also cautioned that China might not be willing to accept the same kind of terms on its loans.
The main concerns revolve around domestic debt though.
Nearly two-thirds of Pakistan’s public debt stock, which is now close to 80% of GDP, is domestic and domestic interest payments account for nearly 90% of overall interest payments.