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Why Pakistan’s Sovereign Bond Does not Attract Foreign Investors ?

March 6, 2016

Did you ever give a thought that in a Global Negative Interest Rates environment, why Pakistan’s 10-year Sovereign Bond did not lure hungry Global Fund Managers that offers highest benchmark return?

In Asia, India is still attractive for foreign investors that offers yield of 7.64 pct on its 10-year bond, it has attracted sizable issuance that has outstanding in excess of USD 650 Billion.

In last 2-quarters, investors shied away from making big investments, which could be due to weak INR trend that though recovered and lost nearly 1 pct of its value this year. During this period excessive volatility was witnessed against Indian Rupee.

Malaysia is another country in the region faced with political and economic difficulties. 2105 was a tough year for its bond market, which is showing signs of recovery. Foreign ownership of MYR bond is estimated to be MYR 218 Billion ($ 53 Billion). Its 10-year bond yield is 3.91 pct. Huge Flight of Capital from Asia is a reason for investments outflow.

Despite all odds, Indonesia has impressed the investors most, it has low inflation, which is whisker below 5 pct and is expected to remain soft. It is considered most attractive market that offers 8.08 pct yield on its 10-year paper.  This is despite investors pulling nearly USD 735 Billion from Asia of which USD 676 Billion was withdrawn from China alone.

In last six-months Indonesia’s bond market has so far attracted nearly USD 5 billion foreign money. This is because of stable economic condition that has helped Indonesian Rupiah to gain nearly 4.7 pct, since January 2016.

In comparison, Pakistan’s bond market though very attractive due to hefty return it offers, failed to attract foreign investors due to lack of strategy.

In Pakistan, Fiscal measures are comforting and inflation will remain soft, as commodity prices abroad and home is on constant decline that should support Monetary Stance towards further easing. There will be lag effect of recent cut in Petrol prices and reduction in Electricity bills that should help to further lower cost of living and lower inflation.

However, despite signs of positive growth and low inflation indicator hinting further accommodation, Pakistan’s Local Currency Denominated Bond failed to attract foreign investors.10-year Government Bond that was offering 9.10 pct yield in January is still very attractive after decline in yield by 85 basis point to 8.25 pct.

However, coupon rate of 10-year Pakistan bond is still too attractive and exceptional, which offers 9.75pct against Indonesia at 8.375 pct. India’s 10-year Government Bond Coupon Rate is 7.59 pct.

This means Pakistan’s Government Bond provides excellent Carry trade opportunity, but Pakistan’s financial managers never considered this as an opportunity to explore. Instead they were more inclined towards offering Euro and Sukuk Bond, which inflates external debt and carries exchange risk. This also means that at the time of Maturity/Settlement or Rollover, the exchange difference will be added to Domestic Debt.

 

Cause of failure to Attract Foreign Investors

 

Ratings is certainly a big factor, as according to Moody’s Outlook, Pakistan is rated B3, which is Highly Speculative Grade when it comes to evaluation and creditworthiness of the issuer of Government Debt. But this does not mean our Finance Managers should become complacent and miss out the opportunity.

 

Here is my reasoning……………

 

-Issuance of Government Paper has exceeded all limits and is a force full measure to contain Deficit to meet IMF Target & to plug holes caused by Revenue shortfall. A Healthy Financial mind would never accept a fact that against Total Schedule Bank deposit of Rs 9.4 Trillion, Bank Holdings of Government Securities is Rs 6.0392 Trillion, which totals to 64.24 pct. In Pakistan, Average Cash Reserve Requirement is 5 pct and Liquidity Requirement is 19 pct.

-With a Total Bank Holdings of Govt Bond/T-Bills of 64.24 pct against Customer deposit, freezing of issuance of Bonds/T-Bills at current levels is almost impossible. Any such plan to halt issuance for 6-months period can trigger financial collapse, as financial system will get clogged. No effort has/is being made to generate income to reduce dependence on borrowings that will ultimately increase the size of Debt.

-Lack of determination to explore new possibilities to divide risk, such as Marketing to Sell Domestic Sovereign Bond to Foreign Investors instead of issuance of Euro or Sukuk Bond to avoid putting all eggs in one basket is one of the causes of its failure.

-Though SBP policy on exchange rate looks firm in favor of stable Pak Rupee, but from investor’s perspective excessive volatility in parallel market & constant demand by exporters is a very discomforting factor for investors. This is vital for any Foreign Investor, as an investor may need some assurance for stabile exchange rate. Weaken of currency drives away Foreigners, China and Russia is the best example.

However, based on last 18-months oil trend, Pakistan’s estimated oil savings has exceeded $ 12 Billion & despite this heavenly support if the country is still depending on Foreign money & unable to reach a comforting point. Then nothing extraordinary should be expected.

Policy change is not Pakistan’s problem. Resistance to change and planning is real problem, which needs to be countered, either through alternative or forcefully.

(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 Transaction)

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