India’s inclusion in the JP Morgan index will prompt investors looking to diversify their portfolios and reallocate funds from other emerging markets
ISLAMABAD: The inclusion of the Indian bond in the JP Morgan Emerging Markets Bond Index (EMBI) from June 28, 2024 is expected to attract significant foreign investment of up to USD 42 billion.
This will not only increase the inflow of dollars in India, leading to the appreciation of the Indian rupee, reducing inflationary pressure and more importantly, making Indian products more competitive in the international market.
However, the inclusion of India, whose GDP is $4.11 trillion in the JP Morgan index, will prompt investors looking to diversify their portfolios and reallocate funds from other emerging markets, including Pakistan, to India, given the stability and potential yields of Indian bonds. . India currently offers investors returns of 7-7.5 percent.
This could lead to reduced demand in the international open market for Pakistan’s bonds, which could increase Pakistan’s borrowing costs. If the Indian rupee were to strengthen significantly, it could affect the trade balance in the region. It may become relatively more difficult for Pakistani exporters to compete with Indian goods in the international market if the appreciation of the Indian rupee leads to cheaper exports from India. This is how Pakistan’s exports may suffer in the global market.
According to the FY25 budget document, Pakistan intends to issue its $600 million sukuk bonds in FY25 to pay its external loan obligations in the next fiscal year. However, there is a chance that Pakistan will not trade any bonds considering Pakistan’s economic outlook.
As of mid-2024, Pakistan’s credit ratings from major international rating agencies are not up to par as Fitch affirmed Pakistan’s rating at “CCC”. This rating reflects significant credit risk, indicating that default is a real possibility, and S&P rated Pakistan ‘CCC+’ with a stable outlook. This assessment points to material risks, with susceptibility to default dependent on favorable economic and business conditions. Under the circumstances, Pakistan is not allowed to list any bond in the open market.
Dr Ashfaque Hasan Khan, a prominent economist and principal of NUST, who was also an advisor to the finance ministry, said the inclusion of the Indian bond in the JP Morgan emerging market bond index will certainly boost the Indian economy but will not impact Pakistan. . He said that considering Pakistan’s current rating, it is not a good time for the finance division to offload its bonds and look for loans as investors would be looking for high premiums and yields.
He said that in his opinion, Pakistan need not list any bonds in the international market because according to the IMF, Pakistan has to provide $9 billion for the next three fiscal operations – $3 billion every year and $3 billion can be arranged. from the World Bank, ADB and other international financial institutions, once the country succeeds in obtaining another IMF loan program. He also argued that investors prefer to invest with high returns when buying the papers of any country rather than invest with lower returns. Hence, Pakistan will not be affected in listing the bonds in the open market after upgrading its rating.
Dr. Khan said Pakistan’s financial managers must aim for economic stabilization and once that is achieved and the country’s credit rating improves, they should move to floating bonds. At least for the next financial year 20024-25, Pakistan should avoid floating bonds, as in that situation, Pakistan could face a higher risk premium, meaning investors will demand higher returns for the perceived increased risk.
Khan said that in 2005-6 during the Musharraf regime, Pakistan was also included in the JP Morgan EMBI when Pakistan’s foreign exchange market grew to $42 billion. However, Pakistan no longer remained a part of it as its stock market fell. Since then, Pakistan could not be included in the JP Morgan bond index.
Another economist, Sakib Sherani, said India’s inclusion in the JP Morgan index will not impact Pakistan. He suggested that Pakistan should not release bonds for financial intermediation in FY25 unless the country’s credit rating improves. He said Pakistan could manage its foreign loan repayments by transferring loans from friendly countries and by brokering more loans from international financial institutions.
However, to finance imports, Pakistan should not rely on dollar loans and should continue with the current import regime, under which imports are compressed to deal with the current account deficit and manage the repayment of external loans on its own. Sherani mentioned that the government has included a $600 million sukuk bond rollover in FY25, but in his view, this is not the right time because the country’s rating needs to improve and economic stabilization still needs to improve.