T-bill outflows jump amid uncertainty

KARACHI: Foreign investment in domestic bonds saw a significant outflow during the first 23 days of August, reflecting a sharp decline in investor confidence.

According to State Bank data released on Wednesday, foreign investors pulled out $103.5 million from treasury bills during this period.

Financial market experts attribute the outflows to the country’s heated political environment and the repeated delays in securing an agreement with the International Monetary Fund (IMF), which have shattered foreign investors’ confidence.

Despite efforts by high-level authorities to secure foreign investments through guarantees, investors remain uncertain about the political and economic outlook.

Experts attribute high outflows to falling returns, delay in IMF deal

Some financial experts also point to the recent decline in interest rates on treasury bills as a contributing factor.

They noted that with inflation now in single digits, the real interest rate stands at a positive 10 per cent. However, a further reduction in the interest rate is expected, as the State Bank is set to announce the monetary policy on Thursday (today).

A significant cut in the interest rate would further reduce returns on treasury bills, making them less attractive to investors despite still relatively high returns.

Experts suggest that investor confidence could be restored if the first tranche of the expected $7 billion IMF loan is released. However, they caution that the increasing political instability will continue to be a major obstacle in attracting foreign investment.

The SBP data shows that in less than two months of the current fiscal year (July 1 to Aug 23), total foreign inflows reached $316m, while outflows totalled $197.6m. Inflows were much stronger in July at $264m compared to just $52m in the first 23 days of August — a stark change that financial experts are analysing, with hopes pinned on the IMF inflows.

Experts warn that if the interest rate on treasury bills falls below 15pc, there will be little chance for a rebound in foreign investment. Currently, the three-month T-bills offer a return of 17.5pc, indicating that the market has already factored in a potential 200 basis point cut in the interest rate, which currently stands at 19.5pc.

Foreign direct investment (FDI) also showed promising growth in July, rising by 63pc to $136.7m, compared to $82m in the same month a year ago.

However, experts predict that FDI could also decline in August if political and economic uncertainty, particularly regarding the IMF loan, persists. Data for August FDI is yet to be released.

Published in Dawn, September 12th, 2024