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 the possibility of a debt moratorium and their implications on the IMF program as well as FX liquidity likely justify current sovereign bond prices.”
This month, the value of those bonds fell to around 33–35 cents on the dollar, leaving them at just a third of their face value and roughly in line with other nations that are seen to be at risk of default, like 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.
Concerns are focused mainly on domestic debt.
Domestic debt makes for about two-thirds of Pakistan’s public debt portfolio, which is currently close to 80% of GDP, and nearly 90% of all interest payments are made domestically.