Dar's Eurobond desire

Dar and company are all set to issue a fresh Euro bond. Road shows are about to start and the boss wants to raise the money before end of this quarter. The question is, does the country really need to borrow from the jittery global markets today? Are the foreign exchange reserves not already at a comfortable position? What is the expected return of the money to be raised? What is the real objective behind the rush to take on expensive foreign debt?
Dar has lately been again showing concerns on the rupee dollar parity after the reluctant two percent depreciation couple of weeks back. Experts fear that his hidden objective is to bring the currency back to Rs100 per US Dollar. Also note that the Finance Minister has publicly announced that foreign exchange reserves will soon reach $20 billion. At present, these reserves are at $18.6 billion.
Last week in a meeting which included the Prime Minister; the Finance Minister categorically said to textile exporters that he would not depreciate the currency and that it is time for them to sell dollars. He warned exporters in a similar fashion back in January 2014 and within a few weeks, the Pakistani Rupee appreciated sharply to $98 per USD. The trigger was fresh foreign flows as a gift from KSA.
This time the magic may come from Euro bond money. The vibes are as soon reserves cross $20 billion; Dar may open his ammunition to adjust currency levels. Someone should tell the Chartered Accountant that currency levels are not directly proportional to the build-up of reserves; rather relative currency movement and relative inflation against trading partners bring equilibrium.
Real effective exchange rate was 102 in February 2014; just before Dar's ego came into play and the nominal currency appreciated. There is no stopping on REER appreciation and its at 120 today. This implies that there is 20 percent room for depreciation, today.
The Finance Ministry, in its attempts to link currency strength to foreign exchange reserves, has been taking unwise decisions to pile up reserves. In April 2014, it raised $2 billion worth of Euro bonds at exuberant rates (5-year paper at 7.25% and 10-years paper at 8.25%); as against the target of $500 million. A few months later, it issued a Sukkuk for $1 billion at 6.75 percent.
The government also sold non-controlling stake of blue chip banking companies in the name of privatization. It has thus forgone the growing and perpetual dividends to get about $1.5 billion, today. How long can the government continue to sell off companies and raise expensive debt to sustain the currency at artificial levels? This irrational behaviour of building unsustainable reserves is just prolonging the bubble. The later it bursts; the worse will be its impact.
Still, the government has decided to raise Euro bond in an environment that is not conducive. It has mandated Citi group, Deutsche Bank and Standard Chartered Bank as joint lead managers to run roadshows from today. The credit rating of the country has improved from what it was at the time of the last issue; B3 (stable) by Moodys, B- (positive) by S&Ps, and B (stable) by Fitch.
The government may target to raise $500 million. If the issue gets oversubscribed (chances are high), it may go for $1-1.5 billion. The rates might be better this time as compared to the previous issue due to improved economic perception of the country in international markets. Although, given the high volatility in global financial markets and expected rate hike by US Federal Reserve (decision will be taken by the time the article is printed); emerging markets are no longer the darling of global investors.
Hence, the rate will likely be around 6.5 and 6.75 percent for a five-year bond. That is not called for. The country's foreign exchange reserves are yielding one percent return while the money to be raised to build reserves is costing six to eight percent. And knowing Dar's modus operandi, if he attempts to appreciate currency after pocketing $1 billion or more through the bond issue; the REER may appreciate further and exports may deteriorate more.
He is doing no good to his party's own cause to improve economic conditions by 2018 elections. He is creating euphoria too soon. By 2017, his entire arsenal will be exhausted and a rude awakening may come in the form of a trend reversal in oil prices. A better strategy could be to find ways to grow exports and boost economic growth. His fixation with currency value is rather a risky strategy. It would be better to be egotistical about exports and GDP growth.
The message for Dar is clear. Since the decision is principally taken to issue Euro bond, please don't oversubscribe and limit yourself to $500 million, Sir.