Hot money.
CONCERNS are increasing among some sections of the business community that the large amounts of foreign investment flowing into local currency government debt securities could tie the State Bank into high interest rates for a longer period, because if rates were to be reduced, this money would run for the exit. Additionally, the foreign investors parking their funds in Pakistan government treasury bills are betting that for the duration that their money is there, an exchange rate depreciation will not take place. Exchange rate movement is one of the key risks faced by all foreign investors, whether in financial instruments or fixed investment, and given the sum of $2.225bn that has come into treasury bills this fiscal year, exchange rate depreciation would wipe out a significant chunk of the profits that have been made.
For the most part, these fears are overstated. This is the first time Pakistan's local currency debt instruments have seen such large foreign participation and the phenomenon is new to most people. As a result, some misunderstandings have also been created. For one, some erroneously believe that foreign investors are getting a return of more than 13pc on their dollar-based investment. The truth is that this is the rupee-based return since the investment is in rupee-based instruments. The dollar equivalent would be much lower. More importantly, others have warned about the danger of 'hot money' being fickle and tied to small movements in interest rates. This is a more important concern...
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