We Think Not!
Word on the street is that Pakistan is heading towards default. However, KTrade is bullish on Pakistan and its stock market: we expect stock prices to rise over time, meaning those who invest now could make a substantial profit. (Want to find the best stocks to invest in? Click here) We will be discussing the factors that indicate the country’s ability to avoid a default and maintain a sustainable economic growth trajectory, as well as what investors can do to take advantage of the current situation. To read the full report, click here.
What Is A Sovereign Default?
You might be thinking, what does ‘defaulting’ even mean? A ‘sovereign default’ occurs when a nation is incapable of meeting its financial obligations and repaying the debts it owes to lenders. It essentially represents a declaration of bankruptcy on a scale that encompasses an entire country. The repercussions of a country defaulting are profound, impacting its economy significantly and causing substantial damage to its credibility.
Why We Think Pakistan Won’t Default:
We think these factors will save Pakistan from declaring a default:
- Manageable Debt
- Geostrategic Importance
Manageable Debt Obligations
Pakistan’s external debt stands at around USD 85 billion, which is only around 25% of its GDP. Notably, commercial loans are only 7% of its total debt. We estimate a funding need of around USD 3.0-5.0bn over the next 12 months. We think this gap can easily be managed through controlled external accounts and support from friendly countries.
Pakistan holds a crucial position as a “Pivotal State” within the global context, especially in relation to China and the US, two prominent global economies. China’s Belt & Road Initiative has made substantial investments in Pakistan, primarily through the China-Pakistan Economic Corridor (CPEC), with the aim of leveraging the country’s trade routes. Additionally, Saudi Arabia has unveiled plans for significant investments in Pakistan, including a refinery valued at $10-12 billion. (Want to know more about the ongoings in the international community? Follow our Facebook page.) Considering the substantial commitments made by these nations to Pakistan, we believe that the probability of Pakistan receiving support funds from them is high.
How to Best Play the Situation?
Pakistan’s equities and international sovereign bonds hold promising investment potential. The benchmark KSE100 index is trading at multiples of 3x, significantly below historical averages. Moreover, Pakistan sovereign bonds are being traded at 30% of their par value. These assets can likely revert to their historical averages once concerns over potential default subside, allowing investors to benefit from a 3x return on their investments. If you want the best investment advice, download KTrade, and become the expert trader you were meant to be!