KARACHI: Foreign investment in government securities have exceeded $711 million since the beginning of the current fiscal year as the country sees an inflow of an unprecedented level on high interest rates and exchange rate stability.
However, analysts say this reserve build-up process is choking growth.
Foreign investment in the treasury bills reached a new high of $267 million during November 1-12. The US, UK and the UAE have increased their portfolios of government t-bills and Pakistan Investment Bonds. Investment from the UK clocked in at $169.5 million, followed by the US ($92.6 million) and the UAE ($5 million). Since the start of the current fiscal year, foreign investment in the government securities stood at $711 million.
State Bank of Pakistan (SBP) Governor Reza Baqir said foreign investors were investing in t-bills because of attractive rates and about $500-600 million foreign investment has been arrived in short-term government bonds.
“Previously, they were investing only in foreign bonds, but it’s a positive signs for the economy that foreign investors are also investing in debt securities,” Baqir told media earlier this week.
“The SBP’s reserves are rising due to improvement in the market sentiments and falling forward-book liabilities,” he added.
Economist Ashfaque Khan said the inflows were seen as foreign portfolio investment at the local equity market as well as foreign investment in the debt market.
“The SBP is concentrating on building up of forex reserves on the basis of very risky inflows and that is why the SBP is unlikely to cut interest rate as asked or expected by all stakeholders,” Khan said. “This build-up of reserves will be at the cost of chocking economic activity in the country. The growth will remain close to population growth rate as predicted by the IMF and the World Bank.” Khan further said this would have effects on job creation and poverty alleviation.
“In other words, inflating reserves at the cost of growth employment and poverty is a replica of the Egyptian model,” he said. “We can also call this stabilisation with inhuman face.”
Faizan Ahmed, head of research at Optimus Capital Management said the interest in local debt securities was mainly due to domestic interest rates favourable to investors.
The US FED recently cut rates for the third time during 2019 amidst slowdown in US economy, ongoing trade disputes and weak global growth outlook. The federal funds rate in the US is now hovering between 1.5-1.75 per cent. Similarly, the European Central Bank also recently slashed its deposit rate to a record low of -0.5 per cent from -0.4 per cent.
“These negative or near-zero interest rates are paving way for a favourable carry-trade in high-yielding markets such as Pakistan where interest rates are at higher levels,” Ahmed said.
“Assuming unchanged exchange rate, this should result into sizable gains for foreign investors as they can borrow funds at cheap rates and invest in Pakistan at high short-term interest rates. These investments are classified as foreign portfolio investments into Pakistan and not foreign debt.”
A banker agreed that the country’s short-term securities are offering yields of approximately 13 per cent in the scenario of negative interest rates globally. “The stability in exchange rate, in fact appreciation in PKR against USD, offers additional benefit to book exchange rate gains,” the banker said, requesting anonymity.
Some analysts expect the SBP to keep policy rate on hold in the upcoming monetary policy reviews as it wants to lure foreign investors by offering high interest rates.
Yaqoob Abubakar, an analyst from Tresmark, expects the SBP to lower the policy rate in the next two to three monetary policies.
“The current high interest rate is an appealing point for investor to secure high interest in their short term investments,” Abubakar said.
The banker said the buying of government securities by foreigners does not create new foreign debt. “The government securities are PKR denominated debt and part of domestic debt, however, the pressure on PKR will be developed once the debt securities are reached to maturity and positions are closed which will lead to outflows as carry trades are rolled back,” he added.