THE latest Pakistani Eurobond, issued last week, has hit controversy even before the finance team has returned to the country.
Pakistan offered 10-year paper at an 8.25pc yield, and received bids worth $1 billion. The last Eurobond was issued in April 2014, when the government also targeted to raise $500 million, but attracted bids worth almost $6 billion and ended up raising $2bn from the exercise. The yield then was also 8.25pc.
The diminished participation, as well as the unchanged yield from the last bond offering in 2014, has led people to suggest that the exercise ought to have been delayed, since markets were still in the grip of jitters following a steady stream of unnerving news from China and hints from the US Federal Reserve that a hike in interest rates may be coming soon.
According to data obtained from Reuters, Pakistan’s 10-year US dollar-denominated bond issued in April last year traded at 104.883 cents on Monday — still well above its issue price but below the record high of almost 110 cents hit earlier in the year. The premium suggests investors see those bonds as a lucrative asset, although it would be necessary to know how long they intend to hold the bond to determine whether the premium means the bonds may have been overpriced.
“It’s important to keep a presence in the private debt markets,” says a high-level source in the banking industry who closely follows the money markets, “but in this particular situation, the timing could have been changed in the light of negative sentiments in global markets. This bond is also likely to be traded at a premium right away, given its pricing.”
The finance ministry justified the issue, saying in a press release that it was necessary to cover repayment of a maturing bond of the same size that was issued in 2006. That bond matures in March. The ministry also saw it as a positive sign that despite difficult global conditions, “the bond was twice oversubscribed”.
Former State Bank governor Salim Raza agrees that the timing presented challenges, and adds it is reasonable to expect that the yield on this bond should have been lower than the last one. “With improvement in underlying inflation and current account flows, compared with the last issue, we should have seen a better coupon rate,” he says, expressing some puzzlement at the urgency with which the government pursued the bond. “Perhaps they have a reserve target in mind which would warrant additional borrowing.”
The relatively secure position of the reserves, at the moment, leaves many confused as to why it was necessary to go ahead with the exercise at a time when global markets are spooked by a sustained rout on Chinese stock markets as well as possibilities of rate hikes in the US.
“It really doesn’t make sense why they were so keen to pick up $500m at a high price when they have $18.5bn in reserves,” says Sakib Sherani, former adviser to the finance minister who has advised the government in earlier Eurobond flotations. “It’s not just $500m, it’s expensive $500m,” he says.
For comparison, Nigeria’s dollar debt carries a yield of 7pc these days, and the average for other African and Middle Eastern countries surveyed by Bloomberg was 2.8pc.
Pakistan’s credit rating was upgraded by Moody’s right after the budget this year. The credit rating agency cited “continued strengthening of the external payments position; and sustained progress in structural reforms under the government’s programme with the IMF” as the key reasons behind the move.
But on Sept 18, days before the bond exercise, it issued a more guarded assessment of Pakistan’s creditworthiness. That assessment, which assigned a provisional rating of B3 to the Eurobond, spoke of “factious relations between the executive, military and judicial branches of government” as well as “very low fiscal strength and high susceptibility to event risk” as key weaknesses holding back Pakistan’s creditworthiness.
That same assessment pointed to a key concern regarding the rising reserves: they are primarily driven by borrowed money. Moody’s said any strength in Pakistan’s creditworthiness stems from “support from multilateral and bilateral lenders”, underlining the importance of Pakistan’s relationship with international financial institutions like the IMF and the World Bank as principal drivers behind its strengthening reserves.
That concern appears to have been raised during the road shows leading up to the bond issue, prompting the federal finance secretary to say on record that Pakistan may yet consider another IMF programme once the current one ends next September. The secretary’s remarks indicate that investors attached high importance to Pakistan’s ongoing programme as a driver of reserve accumulation and sound fiscal management.
Despite its many problems, investors remain interested in Pakistani debt mainly because of the high yields that it offers, and an abiding faith that great powers will never let the country veer towards default. Pakistan’s external debt repayments eased in recent years as the major repayments to the IMF from the 2008 facility drew to a close. But in its last Annual Report, the State Bank cautioned that these are going to rise again from 2017 onwards, “with the onset of repayments of rescheduled Paris Club debt, Eurobonds” as well as repayments from the ongoing IMF programme. “This scenario emphasises the need for caution while framing debt management strategy of Pakistan.”