Pakistan and Argentina bonds’ surge belies bigger reform hurdles By Reuters

By Libby George and Gorgelina de Rosario

LONDON (Reuters) – Investors returned to bonds in Pakistan and Argentina after an infusion of liquidity and optimism about multilateral support, but the two countries had enough help to emerge from the fall elections, experts said.

The recovery in international bonds issued by the two countries has intensified over the past two weeks, with Pakistani bond yields surging over 45% and Argentina closing up 30% year-to-date, making it one of the best performers in its country. Asset class, according to data from JPMorgan (NYSE:).

But the consolidation in bonds contrasts with the difficulties countries face in implementing key reforms once new leaders arrive after the upcoming elections.

“It’s not enough to solve the country’s problems — it’s not enough,” Carlos de Souza, emerging markets portfolio manager at Vontobel Asset Management, said of Pakistan’s recent funding gains, adding that Argentina’s challenges are also formidable.

Pakistan’s 11th $3 billion deal from the International Monetary Fund, after months of talks, received formal approval this week. It was followed by Saudi Arabia and the United Arab Emirates, with injections of two billion dollars and one billion dollars.

This new cash flow means that Pakistan is unlikely to default on its debt in the next six to nine months, de Souza said. Elections must be held in the politically volatile country by early November.

Reserves remain precariously low at $9.8 billion as of July 7, just about two months worth of imports. JPMorgan pegs its external funding needs at more than $30 billion.

Even in the near term, Pakistan will have to stay on top of tough reforms such as allowing its currency to move more or less freely.

“Pakistan has a history of missing fiscal targets and the risk of financial slippage is high in an election year,” JP Morgan said in a note.

The real challenge for Pakistan, which is still recovering financially and physically from last year’s devastating floods, comes after the contentious election, when it will likely need to secure a long-term program from the International Monetary Fund.

This will likely require punishing, and unpopular, cuts in food and fuel subsidies, an increase in electricity prices, and an easing of controls on the rupiah.

Said Roberto H. Sifon Arevalo, head of international sovereign and public finance ratings at S&P Global (NYSE::) “It gives them some space to be able to go through the political moment they are in right now,” adding, “The political situation is still very complicated.”

Reflecting the challenges ahead, the rally in Pakistani bonds was heavily tilted towards shorter maturities.

Deep root problems

In Argentina, notorious for its chaotic cycles of debt and default, the problems are even deeper. South America’s second largest economy is teetering on the brink of recession, with inflation exceeding 100% and a currency that continues to decline in the official and parallel markets.

International reserves are at record lows, and the nation is struggling to stay abreast of the International Monetary Fund’s $44 billion program, a loan secured last year to refinance the failed 2018 bailout.

Faced with an acute dollar scarcity, in June it paid a portion of $2.7 billion owed to the Washington-based lender from a Beijing barter line.

Investors said the bond gains in Argentina reflect the IMF’s commitment to Buenos Aires — accounting for about 28% of the fund’s total lending.

The first test of what’s to come will be Argentina’s mandatory primary vote on August 13 ahead of the general election in October.

“The result doesn’t translate to who gets to sit in the presidential palace, but it does show that the candidates are performing well,” said Jimena Blanco, senior analyst at Verisk (NASDAQ: Maplecroft).

Investors and pollsters said tough times may force the leaders of Pakistan and Argentina to consider needed fiscal reforms.

“The Peronist government faces a great chance of losing the election,” said Alejandro Caterberg, director of Buenos Aires-based polling firm Poliarquia. “Disappointment and frustration among Argentines has reached its highest level in the past two decades.”

The Peronist candidate and current Economy Minister Sergio Massa will face a host of challengers, including the coalition of centrist Horacio Rodriguez Larreta and conservative Patricia Bullrich, and far-right challenger Javier Milli.

Regardless of the winner, reality will not leave much choice in policymaking, said Shamila Khan, head of fixed income, emerging markets and Asia Pacific at UBS Asset Management.

“They have depleted reserves to the point where they don’t have a lot of options going forward.”