BofA upgrades Pakistan bonds on political stability optimism

Bank of America Corp (BofA) raised its recommendation for Pakistan dollar bonds to overweight from marketweight, citing a decrease in political uncertainty following the elections and potential rating improvements, as Bloomberg reported.

“We are upgrading Pakistan to overweight from marketweight with a fair value range of $70-75 at the longer end of the curve,” strategists led by Vladimir Osakovskiy wrote in a note.

Elections-related political uncertainty is diminishing, as the remaining policy risks are largely the same as last year and have already been addressed once through the breakthrough with the IMF, according to BofA’s strategist.

“We are initiating a trade to buy Pakistan notes due in 2026 with a target of 83 and a stop loss of 69,” Vladimir said.

The likely repayment of the $1bn ’24s maturing in April will likely provide support to the entire curve, but mainly draw attention to the 25-26 period, likely prompting further bull-steepening.

“We note remaining political tail risks, as the market may closely monitor Cabinet appointments and evaluate key members based on their ability to meet IMF conditions,” the strategist further added.

Recently, the credit rating agency Fitch said that

hat a “new deal” is key to the country’s credit profile, and we assume one will be achieved within a few months, but an extended negotiation or failure to secure it would increase external liquidity stress and raise the probability of default.

Pakistan’s external position has improved in recent months, with the State Bank of Pakistan reporting net foreign reserves of USD8.0 billion as of 9 February 2024, up from a low of USD2.9 billion on 3 February 2023. Nevertheless, this is low relative to projected external funding needs, which we expect will continue to exceed reserves for at least the next few years. We estimate Pakistan met less than half of its USD18 billion funding plan in the first two quarters of the fiscal year ending June 2024 (FY24), excluding routine rollovers of bilateral debt.