Investors flocked to Sri Lanka and Pakistan’s markets after the embattled nations crossed major hurdles to revive their economies.
Optimism about a turnaround in the crisis-ridden nations helped stock gauges in both countries post their best single-day gain in more than a decade. Sri Lankan stocks had their best day in more than 15 months after the launch of a domestic bond swap program, while Pakistan’s benchmark surged the most since 2008 on Monday after the International Monetary Fund loan deal eased default concerns. The Pakistani rupee climbed 4% to 275 per dollar.
“What we’re seeing now is a relief rally both in equities and bonds,” said Emre Akcakmak, a Dubai-based senior consultant at East Capital, adding that progress of restructuring talks in Sri Lanka and political developments in Pakistan will guide investors forward.
Dollar bonds and currencies for both economies have also rallied after returning from market holidays.
Funding from multilateral lenders has bolstered investors confidence — and returns — across troubled emerging and frontier markets in recent months. Though further re-rating will depend on how these economies fare in the next few months, according to investors, leaving little room for policy errors.
“As long as the IMF is kept on board and political protests are kept at bay, domestically, and food and fuel commodity prices stabilise and US rates ease, externally, then both equity markets are set fair for now,” said Hasnain Malik, a strategist at Tellimer in Dubai. “Of course, having any confidence in the structural reforms necessary to underpin a longer-term investment case is a completely different issue.”
Debt Talks
Further funding support from friendly nations is also a lingering risk as Pakistan stares at a $25 billion debt repayment wall in the year starting July. Elections due later this year will also test Islamabad’s commitment to implement reforms.
While for Sri Lanka, all eyes are now on how fast the debt talks with official creditors including China, India, and the Paris Club as well as foreign bondholders move.
Foreign creditors are agreeable to restructuring the nation’s debt as per International Monetary Fund criteria to reach sustainability, Foreign Minister Ali Sabry said on Monday. Striking a deal will be critical for unlocking IMF funding to keep its economic growth recovery on track.
Columbia Threadneadle expects more gains in Sri Lanka’s dollar debt, for which they see a recovery value in the mid-50 cents on the dollar.
Sri Lanka’s 7.55% 2030 bond was indicated gaining 0.7 cents to 44.8 cents on the dollar, while the Sri Lankan rupee advanced 0.6% to 305.1 against the dollar. Pakistan’s 2024 note maturing in April was indicated surging nearly 5 cents to 77.9 cents on the dollar.
--With assistance from Ishika Mookerjee and Jas Bardia.
Author: Ronojoy Mazumdar, Ashutosh Joshi and Faseeh Mangi