The positive response from international investors to Pakistan’s first Eurobond issuance after seven years has shown that the international market appreciates the economic direction the country has embarked upon.

After reaching $10bn, the foreign exchange reserves will further improve after recent auction of $2bn Eurobond, from a multi-year low of $2.8bn just two months back. While the unexpected $1.5bn grant may have been seen a quid pro quo deal, the response to the Eurobond certainly makes such criticism difficult.

Meanwhile, the Eurobond auction is the largest-ever single transaction for the country. The government had initially targeted to raise $0.5-0.75bn from the issue.

According to details, $1bn was raised from five-year bonds at a fixed rate of 7.25pc, while the remaining $1bn was raised from 10-year bonds at a fixed rate of 8.25pc. US investors subscribed to a major chunk of these bonds (60pc), with second-highest participation of 20pc coming from the UK. Around $5bn was offered, according to government officials.

With the healthy inflow of dollars from the bond in the bag, the probability of a discount rate cut of 50bps has increased, as inflation is already on a downward trend. Later this month, the telecom auction will further improve the external sector, while any further receipt under the Pakistan Development Fund head can be the icing on the cake.

We eye a similar response from banks in this quarters’ Pakistan Investment Bond auction, as they embark on improving their earning asset yields in a declining interest rate scenario.

And with the fiscal deficit also reportedly at mere 3.1pc in the first nine months of this fiscal (9MFY14), the full-year target looks set to be achieved.

However, improvement on the fiscal front has come largely due to cuts in development expenditure targets, and not due to attainment of tax targets. The plan to broaden the tax net has so far failed, and it will be an uphill task going forward.

Besides, the government has so far been unable to improve the performance of loss-making state-owned enterprises, and the plan to dispose off these white elephants has reportedly hit snags.

Stock market: For the equity market, the improvement on the external side is a welcome addition after the news about the recent MSCI Frontier Market index weight increase. In our view, corporate growth has been resilient despite the tough economic and political environments. However, the key issue is macro stability, which this government looks set to provide.

We expect the re-rating theme to continue in the near future, as foreigners look at Pakistan from an improved perspective and interest rates dip going forward.

Inflation down: Cumulative 9MFY14 CPI numbers stand at 8.6pc. Going forward, inflation numbers are expected to dip further to 8pc this month, mainly due to base effect, and despite the quarterly revision in the house rent index.

Food prices have also started to come off from their peak in March, and the reduction in fuel price also bodes well. We project inflation in the last quarter of this fiscal to clock in at around 7.8pc, with the FY14 average coming at around 8.4pc.

Foreigners’ interes: The stock market is up by a big 6pc in April to-date alone, and net foreign investors’ portfolio investment (FIPI) inflow touched $49mn in just nine days of this month, showing the bullish view of foreigners on the Pakistani market. (edited and abridged)

Taha Khan Javed, head of research department, Taurus Securities