Pakistan’s ship comes in

AS the war in Iran drags on, emerging market powerhouses are reeling from the closure of the Strait of Hormuz, one of the oil trade’s most important routes.

Turkiye’s foreign reserves are depleting at a record pace, India is considering all options as the rupee plunges to record lows, and Indonesia has delivered a jumbo interest rate hike to defend its currency.

If these heavyweights are struggling, what chance is there for smaller nations?

Well, there is one relatively small country that’s not crying.

Pakistan is doing remarkably well considering the circumstances. In mid-April, the government re-entered the global bond market after being shut out for almost four years, raising US$750mil – 50% more than it had asked for.

Bond yields over US Treasuries temporarily widened to about five percentage points in March but have largely returned to pre-war levels.

This resilience goes against global investors’ conventional wisdom.

In times of turbulence, developing countries with twin deficits – namely in the current account and fiscal budget – are vulnerable to hot money flows and can easily tip into distress.

Pakistan, which has received an extraordinary 25 bailouts from the International Monetary Fund (IMF), fits that bill perfectly.

As an energy importer, it relies heavily on Gulf states, which supply over 80% of its fuel imports.

Remittances from citizens working in the region account for about 5% of gross domestic product; that money flow can 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 2027, pushing the country back into the red, according to the IMF.

This would imply an estimated US$12bil financing gap until June 2028. As it currently stands, the country doesn’t even have enough foreign exchange reserves to cover three months of imports.

So, why are global investors so relaxed about Pakistan?

Co-operating with the IMF helps. Pakistan has been on a US$7bil loan deal since 2024.

During a recent IMF staff visit, Islamabad reaffirmed its commitment to a 2% fiscal surplus over the next year. Earlier this month, the organisation approved the disbursement of US$1.3bil in loans.

But the really important reason is Pakistan’s unlikely role as broker of peace in the Gulf. That role 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$3bil to the State Bank of Pakistan and extended a US$5bil loan facility to 2028, after the United Arab Emirates abruptly declined to roll over its US$3.5bil debt.

The once-close partnership between the two Gulf nations has erupted into open rivalry.

Abu Dhabi recently withdrew from the Organisation of the Petroleum Exporting Countries, or Opec, the Riyadh-dominated cartel of leading oil producers.

China is also keen to prop up its neighbour.

Last week, Pakistan issued its first sovereign panda bond, the initial tranche of a broader US$1bil programme. With the latest 1.75 billion yuan (US$257mil) note, Islamabad is paying only a 2.5% coupon.

Foreign reserves had reached US$17.1bil as of May 15, up from US$16bil at the end of 2025.

In other words, the US$12bil funding gap may be a lot for Pakistan, but nothing for economic behemoths such as Saudi Arabia and China, which increasingly recognise 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 materialise.

Meanwhile, the government likely hopes that Gwadar Port, 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 doesn’t show up on current accounts. But it certainly relaxes borrowing constraints.

Historically, emerging market investors have pored over a country’s external accounts, frowning whenever they saw an over-reliance 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’s 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’s breaking some emerging markets investing myths, too. — Bloomberg