Diversifying Sources of External Debt – Editorials

EDITORIAL: Earlier this week, the government raised $ 1 billion on the international bond market in 5, 10 and 30 year Eurobonds at better rates than previous issues. In March 2021, when the government turned to the international capital market to issue debt after a lull, it raised $ 2.5 billion on those three bond maturities. At that time, the government appointed program advisers for one year so that they could issue new instruments or turn on the tap at any time between March 2021 and March 2022.

This year (FY22), the government budgeted 560 billion rupees ($ 3.5 billion) from Euro Bond / International Sukuk. In the first month, the government raised $ 1 billion. Expect more Euro Bond or Sukuk issues in the year following this schedule. This is a good strategy because it gives the government the flexibility to play the market rather than hitting the market when the need arises. Credit goes to the Islamabad debt office which, under the leadership of the then finance minister, Dr Hafeez Sheikh, was able to structure it accordingly.

Earlier this week, the government decided to turn on the tap on previously issued bonds as it forecasts better prices as US Treasury yields are expected to move north in the coming weeks. The government raised $ 300 million at 5.875% in 5-year bonds, $ 400 million at 7.125% in 10-year bonds and $ 300 million at 8.450% in 30-year bonds. The rates are better than the indicative yields of 6-6.125%, 7.375% and 8.75% in the three tenors, respectively. The rates are also better than what the government received on March 21 – where it raised $ 1 billion over 5 years at 6%, $ 1 billion over 10 years at 7.375% and $ 0.5 billion over 30 years at 8.875%.

In the recent issue (July 21), the size of the book was over $ 3 billion; however, the government raised less than a third. The good sign is that there has been increased interest in 30-year bonds, which offered bids between $ 1.2 billion and $ 1.5 billion. This indicates two things. A; that there is a preference in the market for attractive returns and that he is prepared to offer higher amounts over longer terms to achieve those returns. The other thing is that the world views Pakistan as a relatively more stable borrower than in the recent past. In previous editions Pakistan used to get higher interest in 5 years and now the sentiment is being reversed.

After this $ 1 billion take, Pakistan’s total outstanding debt on global financial markets stands at $ 8.8 billion. Of this amount, $ 1 billion will mature in October 2021, while another $ 1 billion in December 2022. The government is likely to issue bonds of similar (or greater) amounts against maturing bonds. The government could have raised a higher amount in this issue, but the bids were lower for the 5-year bonds and the government interest had to issue at lower rates.

The next debt issue is expected in a few months and should be in sukuk, as these are better valued and the country would have a diverse mix. If the engagement of the F-9 fleet in Islamabad for the sukuk had not become a political issue, this issue would have been sukuk instead of Eurobonds. The government is looking for more assets that can be backed by the sukuk issuance.

As we can see, the government is diversifying its debt stock. The issuance of Naya Pakistan (NPC) certificates for Roshan digital account holders (RDA) has exceeded $ 1 billion in 10 months. By 2019, the carry trade had become attractive and more than $ 3 billion came to Pakistan’s domestic bond market. However, their exit was much faster than their entry. It is worthwhile for Pakistan to exploit all possible markets and avenues to reduce its dependence on bilateral or multilateral creditors, as these are likely to be influenced with political repercussions.

Copyright Business Recorder, 2021

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