'Junk Borrower' Pakistan Raises $3 Billion: Economic Comeback Or False Dawn?

Pakistan has managed to do something that would have seemed difficult not too long ago.

It has raised $3 billion from global investors through a bond sale, as international investors showed renewed interest in lending money to the cash-strapped country.

Significantly, Pakistan is still considered a "junk-rated" borrower. In simple terms, this means rating agencies believe there is a higher risk that the country could face trouble repaying its debt compared with countries with investment-grade ratings.

How Pakistan Raised $3 Billion In Debt

Pakistan raised the money through two bonds. It sold $1.75 billion of five-year debt at a yield of 7.75 per cent. It also sold $1.25 billion of 10-year debt at 8.25 per cent, according to a Bloomberg report.

Orders for the bonds touched almost $6 billion, according to Pakistan's finance ministry. That means investors were willing to offer roughly twice the amount of money Pakistan was seeking.

For Pakistan, this is important because it gives the government access to dollars without having to depend as heavily on short-term foreign loans. "This will help in supporting FX reserves and will reduce reliance on risky short term dollar loans and deposit, reducing rollover risks," said Mohammed Sohail, Chief Executive Officer at Topline Securities in Karachi.

What Does 'Junk Bond' Actually Mean?

The word "junk" can sound alarming. But it does not mean that investors believe Pakistan will definitely default.

Credit-rating agencies give countries ratings based on how likely they think they are to repay their debt. A higher rating generally means lower perceived risk. A lower rating means investors demand a higher return for taking that risk.

Pakistan remains near the bottom of the credit-rating ladder. Moody's rates Pakistan at B3, which is several levels below investment grade. However, Moody's upgraded Pakistan's rating last month, following a similar upgrade by S&P in July.

The upgrades suggest that rating agencies see some improvement in Pakistan's ability to manage its finances. But the country still has major weaknesses.

Why Are Investors Taking The Risk

Pakistan has been trying to rebuild its economy after coming close to a default. It received an International Monetary Fund bailout in 2022 and has since been working on reforms aimed at improving its finances and rebuilding its foreign-exchange reserves.

The latest bond sale shows that international investors are willing to give Pakistan another chance. However, that does not necessarily mean the country's economic problems are over.

Dr Vishal Dagar, Assistant Professor, Economics, Great Lakes Gurgaon, said the bond sale is a "win-win" development for Pakistan because it points to a tentative return of investor confidence.

But he also sounded a note of caution. According to Dagar, Pakistan's junk status still highlights its structural weaknesses, including high debt-servicing costs, thin foreign-exchange reserves and political uncertainty. He described the latest development as a "cautious vote of confidence" rather than a signal of a full economic recovery.

The real test, Dagar said, will be whether Islamabad can maintain fiscal discipline and keep its reform programme moving even after global investors become less willing to take risks.

Global Investors In Risk-Taking Mode

There is another reason Pakistan managed to raise such a large amount. Global investors are currently looking for investments that offer higher returns.

Pakistan's bonds offer exactly that. Investors who buy these bonds are effectively lending money to Pakistan. In return, they receive interest. Because Pakistan is considered a risky borrower, it has to offer a relatively high interest rate to attract them.

This is also why the timing of the sale matters. Risk premiums on global junk bonds are close to their lowest levels in nearly two decades. In other words, investors are currently more comfortable taking risks in exchange for higher returns.

That has created a favourable window for countries such as Pakistan to borrow internationally. But the window may not stay open forever.

India Continues Economic Ascent 

The contrast with India is striking.

Just days ago, the Japan Credit Rating Agency (JCR) upgraded India's sovereign credit rating from BBB+ to A- with a stable outlook. The upgrade came after the agency highlighted India's strong economic growth, resilient consumer spending, public investment and improvements in its financial system. 

JCR said India's economy has maintained growth of around 7 per cent. It also pointed to improvements in the banking system, including a decline in the non-performing loan ratio to below 2 per cent.