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“Pakistan EURO Bond Issuance confirms Economy in Doldrums”

September 27, 2015

Launching of third global issue, Euro Bond of $ 500 Million @ 8.25% that matures in next 10-years in a short span of time is a bad indicator, hinting Pakistan’s economy is in doldrums and is still in a struggling mode fearing funding shortage in Medium to Long Term.

Less than 18-months ago, Pakistan raised US 2 billion from international debt market by issuing 5 years and 10 years bond of US Dollar One Billion each costing 7.25 pct and 8.25 pct respectively.

Again exactly eleven months from now Pakistan raised USD 1 Billion from international debt market for 5-year tenor offering profit rate of 6.75 pct, which was 50 basis point lower than 5-year Euro Bond, but above 5 pct over benchmark rate of 5-years Treasuries.

Generally investors measure the strength of any country’s economy through international rating agencies outlook. For reference, I would like to quote Moody’s past 20-years rating outlook on Pakistan that will give better clue about economic performance of past and its performance in recent times.

A move towards “A” represents Higher Outlook and towards “C” represents Lower Outlook.

11-07-1995   B1
06-11-1996   B2
28-05-1998   B3
23-10-1998   Caa1
13-02-2002   B3
20-10-2003   B2
15-11-2003   (Stable)
20-01-2005  (Positive)
08-11-2006   (Under Review)
22-11-2006   B1 (Stable)
05-11-2007   (Negative)
21-05-2008   B2 (Stable)
23-09-2008   (Negative)
28-10-2008   B3 (Under Review)
12-12-2008   B3 (Negative)
17-08-2009   (Stable)
13-07-2012   Caa1 (Negative)
14-07-2014   Caa1 (Stable)
25-03-2015   Caa1 (Positive)
11-06-2015   B3 (Stable)

Sharp rise in Total Public Debt is yet another Very Worrisome Economic Indicator that should ring alarm bells. Please find below details of FY end data of last three and a half decades that would provide further direction.

FY 1980 Rs 155.4 Billion
FY 1990 Rs 801.5 Billion
FY 1995 Rs 1.662 Trillion
FY 2000 Rs 3.018 Trillion
FY 2005 Rs 4.091 Trillion
FY 2006 Rs 4.310 Trillion
FY 2007 Rs 4.750 Trillion
FY 2008 Rs 6.044 Trillion
FY 2009 Rs 7.629 Trillion
FY 2010 Rs 8.911 Trillion
FY 2011 RS 10.70 Trillion
FY 2012 Rs 12.67 Trillion
FY 2013 Rs 16.39 Trillion
FY 2014 Rs 18.29 Trillion
FY 2015 Rs 19.91 Trillion

Here is another Key Data, Banks Holdings of Government of Pakistan (GoP) Securities on Outstanding Stock Basis, which is why Banks are more keen to invest in PIB’s, T/Bills & GOP Ijra Sukuk (GIS) than Corporate Sector Lending as funding for investment in GoP is made available at subsidized rates. This why as of August 31, 2015 against Bank Advances of Rs 4.566 Trillion Total investments in GoP Paper is Rs 5.767 Trillion.

TOTAL = PIB-T/bills-GIS Holdings

Q1-FY13 Rs 3.365 Trillion
Q2-FY13 Rs 3.626 Trillion
Q3-FY13 Rs 3.705 Trillion
Q4-FY13 Rs 3.822 Trillion
Q1-FY14 Rs 3.552 Trillion
Q2-FY14 Rs 3.815 Trillion
Q3-FY14 Rs 4.159 Trillion
Q4-FY14 Rs 4.067 Trillion
Q1-FY15 Rs 4.265 Trillion
Q2-FY15 Rs 4.735 Trillion
Q3-FY15 Rs 5.283 Trillion
As on Aug 31, 2015 Rs 5.767 Trillion

After the 1990 debt crisis Pakistan re-entered international Capital Market and in February 2004, issued $ 500 Million 5-years Bond @ 6.75 that matured in 2009. After the issuance of Bond there was excessive criticism as the price of Bond was 375 basis point over LIBOR.

In 2005 it floated $ 600 Million Islamic Bond that was priced 220 basis point over 6-month LIBOR. In 2006, it sold $ 800 Million in two parts 10 years and 30 years. It sold $ 500 Million notes @ 7.125 pct that matures on March 3, 2016, which 239 basis point over US Treasuries and $ 300 Million 30-year paper maturing on March 31, 2036 @ 7.875 pct priced 301.8 basis point over US Treasuries.

For comparison let’s begin from 2007 onwards. In 2007, 5-years US Treasuries yield was around 5.05 pct, 10-year @ 5.15 pct and 30-years was at 5.25 pct. Pakistan borrowed nearly USD 1.3 Billion, $ 500 Million @ 6.75 pct and 30-year @ 8.37 pct, which means cost was comfortably below 2 pct.

In June 2014, Pakistan floated another USD 2 Billion Euro Bond of Billion each in 5 years and 10-years at 7.25 pct and 8.25 pct respectively. US Bond yield was 1.5 pct and 2.15 pct respectively. This means in comparison to 2007 borrowing cost in 2014 was much higher than 5 pct.

Why has Pakistan once again started its expensive borrowing campaign, when FX Reserves has reached $ 18.726 Billion ($ 13.690 + $ 5.036)? It clearly indicates that there is no intention to end reliance on IMF.

It could a proactive measure in preparation to defend its Forex Reserves as there is $ 500 Million Bond maturity due in 2017 and more importantly, in same years IMF Quota of 36-month EFF arrangement of about $ 6.75 Billion will be completed.

Present economic strategy confirms Pakistan’s 2-decade old history of pathetic economic performance that may linger on in the absence economic vision to promote industrial and manufacturing growth.

In present times, unfortunately, the country is not benefitting from continued increase in remittance, which could get close to $ 19 Billion and is most likely to surpass this number by the end of current fiscal year.

Similarly, softer international oil prices that should ease burden on exchequer by around $ 5 Billion by the end of FY 15-16, as softer oil prices in the international market should ease oil bill that should comfortably remain around or below $ 8 to $ 9 Billion. It is pity that the nation did not benefit from falling oil prices.

One thing, which is not understandable, is that why every governments of past and present always term issuance of Euro-Bond a great success? How such a forced expensive borrowing due to economic failure can be termed as accomplishment of target? Do our economic managers think that the nation is duffer and has zero market understanding or is it because of lack of accountability, since they firmly believe they can always easily get away from financial adventurism?

The real truth is that if we take a detailed look at the data available, surprisingly robust growth and booming economic period was witnessed during Military Regime suggesting fall in corruption and better management of economy than claimed by the Democratic elected government.

The reality is that the Economic risk has increased by manifolds due to unnecessary Economic Exposure that did not translate into Economic well being. There has to be a concept check and balance through legislation, which is the only hope or else there is no end to the ongoing Economic misery.


(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transactions.)

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