The rally in Pakistani dollar bonds needs authorities to stay on the path of economic reforms proposed by the International Monetary Fund (IMF) to extend gains, according to investors. 

Pakistan’s dollar bonds have delivered returns of about 30% this year, the highest in Asia. Most of those returns came ahead of the IMF’s initial approval for a new three-year lending package last month. 

The notes may rise to 85-90 cents on the dollar, from the mid-70 cents now, but need a risk-on market, according to Mackay Shields. Eastspring Investments is buying on dip.

The next leg of gains will require the South Asian nation to keep tough reform measures going. Pakistan also needs to strike long-term financing assurances from bilateral creditors before getting final approval from the IMF board for its new US$7 billion loan package, expected by the end of August.  

“With the rally this year, commitment to the IMF programme is needed for further capital gains,” said Shamaila Khan, UBS Asset Management’s head of fixed income for emerging markets and Asia Pacific.  

The new loan package will provide breathing room for Prime Minister Shehbaz Sharif’s government to shore up a faltering economy and manage its mounting debts.

“Bonds will trade within a range, as reforms continue and with coupon income to provide double-digit return over the medium term,” said Eric Fang, fund manager at Eastspring Investments in Singapore.

Pakistan’s 7.375% 2031 bond traded steady at around 77 cents on the dollar on Tuesday, while notes maturing 2051 traded flat at around 72 cents, according to indicative pricing compiled by Bloomberg.

Investors will also watch Pakistan’s plans to return to capital markets, after Fitch Ratings upgraded the nation’s credit rating last week to CCC+, from CCC, while S&P Global Ratings affirmed its existing rating at CCC+. 

Pakistan will consider a Eurobond sale after the nation’s overall credit rating is improved, governor Jameel Ahmad said after the Fitch upgrade.

Fresh foreign-currency issuance will act as a potential driver for Pakistan’s debt spreads to narrow, said Philip Fielding, co-head of emerging markets at Mackay Shields in London.

  - Bloomberg