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Pakistan’s external financing gap could rise to $8b: Morgan Stanley

Avoid long exposure to Pakistan bonds, Morgan Stanley tells clients.

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A report by Morgan Stanley released on Friday said Pakistan’s external financing gap could rise to $8 billion, adding that the outlook for the country is worsening.

The American financial services company said Pakistan has “underperformed significantly since February.” with some of its bonds selling for as low as sixty cents on the dollar, with spreads widening up to 1250 basis points.

The report pointed out that the key driver has been the deteriorating current account deficit, “increased risks to the IMF disbursements,” and slowing remittances are principally responsible.

Read more: UN body: Ukraine war has strongly impacted Pakistan’s economy

It said, “We expect total funding need to be $35 billion for 2022.” The current account deficit could widen to $17bn, and the “predetermined drain on reserves” is $18bn.
“In a better scenario, we estimate the available sources to be $32bn, assuming Pakistan will receive the next IMF tranches and issue Eurobonds successfully. This means a $3bn funding gap.”

Thus, despite the IMF fund program and a successful Eurobond floatation, Pakistan required $3bn to plug the financing gap in 2022.

“[I]f Pakistan does not get the rest of the EFF loans from the IMF, it would add $2.8bn of funding pressure. And if Pakistan is not able to roll over the global sukuk bond due in December 2022 it adds another $1bn of funding pressure. In this case we estimate the funding gap to be $8bn, also driven by lower private sector loan disbursements”.

Read more: PDM govt succumbs to IMF as it hikes petrol rate

Pointing out the “downside risks regarding funding,” rising oil process, and the uncertainty around IMF talks, the report bluntly suggested a dislike stance on Pakistan to the clients.
“[W]e don’t think that now is a good time to be long on Pakistan despite their cheaper valuations.”

On Thursday, the government rolled back subsidies on fuel prices to comply with the International Monetary Fund (IMF) conditions, a step that was welcomed by the markets and somewhat restored the country’s economic viability.

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