As the Iran war drags on, emerging markets are reeling from the closure of the Strait of Hormuz, one of the oil trade’s most important routes. Turkey’s foreign reserves are depleting at record pace, India is considering all options as the rupee plunges to record lows and Indonesia delivered a jumbo interest rate hike to defend its currency. If these heavyweights are struggling, what chances are there for smaller nations?
Pakistan is doing remarkably well considering the circumstances. Last month, its government re-entered the global bond market after being shut out for almost four years, raising US$750 million and 50 percent more than it had asked for. Bond yields over US Treasuries temporarily widened to about 5 percentage points in March, but have largely gone back to prewar levels. The local rupee has been stable at about 280 per US dollar and the benchmark KSE-100 Index is down only 1.3 percent for the year.
The resilience goes against global investors’ conventional wisdom. In times of turbulence, developing countries with twin deficits, namely in current accounts and fiscal budget, are vulnerable to hot money flows and could easily tip into distress, and Pakistan, which has received an extraordinary 25 bailouts from the IMF, fits the bill perfectly.
As an energy importer, it relies heavily on Gulf states, which supply more than 80 percent of its fuel imports. Remittances from citizens working in the region account for about 5 percent of GDP; that money flow could halve if the Middle East slumps into an economic downturn.
Because of the war, its current account deficit could increase by 1.5 percentage points for the year ending June next year, pushing the country back to the red, the IMF said. This would imply an estimated US$12 billion financing gap until June 2028. As it stands, the country does not even have enough foreign exchange reserves to cover three months of imports. So, why are global investors so relaxed about Pakistan?
Cooperating with the IMF helps. Pakistan has been on a US$7 billion loan deal since 2024. During a recent IMF staff visit, Islamabad reaffirmed its commitment to a 2 percent fiscal surplus over the next year. Earlier this month, the organization approved the disbursal of US$1.3 billion in loans.
More importantly, Pakistan’s unlikely role as broker of peace in the Gulf has put it back on institutional investors’ radar.
Being a friend to Islamabad during its times of need has become strategically important. Last month, Saudi Arabia deposited US$3 billion in State Bank of Pakistan and extended a US$5 billion loan facility to 2028, after the United Arab of Emirates abruptly declined to roll over its US$3.5 billion debt. The once-close partnership between the two Gulf nations has erupted into open rivalry. Abu Dhabi recently withdrew from the OPEC, the Riyadh-dominated cartel of leading oil producers.
China is also keen to prop up its neighbor. Last week, Pakistan issued its first sovereign panda bond, the initial tranche of a broader US$1 billion program. With the latest 1.75 billion yuan (US$258.13 million) note, Islamabad is paying only a 2.5 percent coupon. Foreign reserves reached US$17.1 billion as of May 15, up from US$16 billion at the end of last year.
In other words, the US$12 billion funding gap might be a lot for Pakistan, but nothing for economic behemoths such as Saudi Arabia and China, which increasingly recognize the South Asian country’s strategic importance. Islamabad’s military strength automatically gives it a prominent seat at a future “Islamic NATO,” should one ever materialize. Meanwhile, the government likely hopes that the Port of Gwadar, close to the Strait of Hormuz but not in the immediate conflict zone, could emerge as a major logistics hub for safe anchorage.
Geopolitical prominence does not show up on current accounts, but it certainly relaxes borrowing constraints.
Historically, emerging markets investors have pored over a country’s external accounts, frowning whenever they saw an overreliance on imports of essential goods, such as food and energy, or thin hard-currency reserve buffers. Pakistan’s resilience this year has proved that thinking wrong. The energy shock has not led to a collapse of public finances. There is no currency crisis, either.
With US President Donald Trump ripping apart the world order, Pakistan, which has gone to the IMF more times than any other nation, is shedding its image as a failed state. It is breaking some emerging market investing myths, too.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She is a CFA charterholder. This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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