KARACHI: The influx of foreign capital into local bonds has reversed, with a substantial $78 million disinvestment occurring in the first 15 days of August.
Although there are a number of possible reasons for the abrupt turnaround in investment inflows, investors blame the falling returns on treasury bills, which are expected to continue to decline in the near future.
July, the first month of the current fiscal year, saw record inflows of $258.3 million into Treasury Bills.
The State Bank’s most recent data, which was made public on Friday, shows that investment inflows drastically decreased in August, suggesting a change in investment strategy. Experts in finance anticipate a further reduction in T-bill inflows because of two main factors: declining T-bill returns and the government’s increasing difficulties in obtaining a $7 billion loan from the IMF, which has allegedly asked Pakistan to obtain a $12 billion rollover from Saudi Arabia, China, and the United Arab Emirates.
A decrease in returns on government papers is the reason for the reversal in inflows.
During the first 15 days of August, there were $8.194 million in inflows and $86.347 million outflows from foreign investments. $78.15 million was the net outflow.
The SBP data shows that overall inflows during the first half of August and the month of July were $271.5 million, while withdrawals totaled $180 million, leaving a net residual investment of $91.5 million.
The excellent returns on domestic bonds and the stable currency rate are the reasons behind the inflows into T-bills. Nonetheless, returns on T-bills have decreased as a result of the State Bank’s decision on July 29 to lower interest rates by 100 basis points to 19.5%. T-bill returns have already decreased to 17.4 percent, and for 12-month T-bills, they are even lower at 16.99 percent.
Comparing the returns to other developing nations, financial experts argued they are still too high. By taking advantage of this chance and borrowing money at cheaper rates from foreign banks, overseas investors are investing in Pakistan and making returns that are more than twice as high.
They contend that because both exports and remittances are displaying strong health, the stable exchange rate, which is bolstered by the State Bank’s foreign exchange reserves of over $9.4 billion, demonstrates economic stability.
But the State Bank was compelled to lower interest rates even further due to the decreasing rate of inflation. The State Bank is expected to lower interest rates by 150 basis points in its upcoming monetary policy announcement on September 12th, according to financial experts.
Should the rate on T-bills be further lowered, international investors might become less inclined to purchase domestic bonds.
The nation received $580.8 million in total inflows into T-bills during the most recent fiscal year.
Experts believed that this might be a blow to the nation, which is already having trouble paying off its external debt. Despite a recent small improvement in the country’s ratings by Fitch and S&P, the nation remains unable to issue bonds to raise cash from the foreign market.
