The global capital markets are fluid whilst the need of raising foreign debt at home is paramount. That is why, the decision to go to the international market for issuance of both Euro and Sukuk bonds is right. It is a bit late though.
The country started losing foreign exchange reserves fast since October 2016 while the response to similar or even inferior economies by international debt market was overwhelming in the last few months; yet Pakistan was not catching up.
Finally, the focus of government is back on where it should be. As per news reports, the government has finalized consortiums one each for both Euro and Sukuk issuances. The former comprises of four international banks while the latter issuance would be dealt by six banks.
The government is eyeing a billion dollar each from both issuances with minimum of $500 million from every transaction. Seeing the response other emerging economies attracted and the growing external financing needs of the country, acceptance of higher amounts would not be surprising.
Last issue of Euro bond in September 2015 was not a great experience - timings were wrong as global markets were not receptive and the need to raise money was not really there (read: Eurobond: questions begging answers published on Sep 28, 2015). Prior to that, the government had not only raised $2 billion from Euro bond in Apr14 - $1 billion each of 5 and 10 year maturity at 7.75 percent and 8.25 percent respectively; but the foreign exchange reserves were heading north as well.
The reasons sought by finance ministry were to kind of rollover the $500 million bond expiring in Mar16 (issued in Mar06 at 6.25%). The option proved to be expensive and got a wrath from analysts and economists. In between the two Euro bonds, $1 billion was raised from a 5-year Sukuk bond at 6.75 percent in Nov14. And the latest Sukuk was issued in Oct16 - $1 billion was raised at 5.5 percent.
Thus, the latest Sukuk in Oct16 was by far the best deal the country has had in recent history. The feel good factor was there as stock market was rallying like there was no stopping to bull run with reserves at all time high.
Ever since, foreign exchange reserves have tanked. The political climate changed fast with Panama papers saga and the stock market fell like nine pins. However, the economic growth has been solid. Since the start of calendar year 2017, the private sector led growth is encouraging, and this coupled with expansionary economic cycle soared the import bill. Current account deficit is on average 1$ billion for the past twelve months and the reserves fell by $4 billion in the same time.
The need to stabilize balance of payment could not be over emphasized as tightening of exchange rate, monetary and fiscal policies would adversely hurt the economy. It’s imperative to bring the feel good factor back as middle level businesses are having cash flow problems owing to political uncertainties which can fast make macroeconomic framework unstable.
The need to build foreign exchange reserves is imperative. The question is whether going to international capital debt market is the right option. Let’s try to evaluate recent few issuance by developing economies (read “Options for Dar and Abbasi’ published on 30th Aug 2017).
The market has the appetite seeing the response for bonds issued by Iraq and Argentina. The Latin American economy which has defaulted eight times since its inception in 1816, and twice in this century, was still able to fetch $2.75 billion in a hundred year bond at an effective yield of eight percent. War torn Iraq raised $1billion in a 10-year bond at 6.75 percent.
Why can the booming middle class Pakistan economy not get the money from international market at better rates? Good luck to ministry of finance on issues planned for mid November!
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