KARACHI: Foreign investors have pulled out more than $1.388 billion from the country’s capital markets in the ongoing month with hot money outflows amounting to $1.28bn, the State Bank of Pakistan (SBP) data showed on Thursday.

Coronavirus pandemic has instigated a widespread selloff from the emerging markets as investors have dumped more than $30bn worth of riskier investments during the last 45 days towards safer bets especially currencies.

Barring dollar, almost every other instrument has been blown away by panic selling despite emergency measures announced by central banks across the world including the State Bank of Pakistan (SBP) which cut interest rates by just 75bps for the first time since May 2016 disappointing the markets.

In Pakistan, since March 1 foreign investors have pulled $75.645 million from equity markets, $1.28bn from treasury bills (T-bills) and $33.282m from long-term Pakistan Investment Bonds (PIBs) landing the net flows in the first 20 days of this month to negative $1.35bn.

Total hot money inflows in the T-bills during the current fiscal year rose to $3.431bn. However, outflows during the fiscal year have reached $1.593bn bringing net investment in the short-term instruments down to $1.838bn by Wednesday (March 18). Major chunk of these outflows have come from UK-based investors who have reduced their positions by $1.15bn or around 40pc of the total investments in the risk-free government papers.

Sources blame wild swings in currency markets for this outflow. The pound sterling was trading at Rs206.34 on March 9 against Rs197.9 on March 1.

Earlier this week, the SBP also unveiled Rs105bn package to address challenges posed by coronavirus pandemic. While announcing the policy statement, SBP Governor Reza Baqir said the sell-off in capital markets is driven by external factors and is not unique to Pakistan.

However, analysts and observers said the SBP may have shied from drastic cut in order to contain the hot money outflow.

Baqir however said the 75bps cut was announced after considering preliminary information regarding the impact of coronavirus on the economy. Commenting on the T-bill outflows, he said the flight of capital towards safer investment avenues was due to panic-selling in the financial markets across the globe while adding that the SBP has adequate reserves to manage risks emanating from these outflows.

Outflow trends have been similar across the rest of emerging markets including India where foreign portfolio investors have pulled out $8.5bn from equities and bonds in March.

In a report released on Monday, the International Institute of Finance, which tracks more than 20 emerging markets, said the “cumulative outflows since late January have surpassed the levels observed at the peak of the global financial crisis and are an order of magnitude larger relative to the size of the global economy than in stress episodes such as the Asian financial crisis or the taper tantrum.”

These sudden outflows have put emerging markets with high external financing needs at risk forcing central banks with adequate fiscal space to announce stimulus packages.

Meanwhile, investors have shifted towards currency markets especially dollar. The Bloomberg dollar index surged to all-time high on Thursday after currency markets saw staggering moves in the wake of coronavirus outbreak.

Published in Dawn, March 20th, 2020