Make room for corporate debt instruments

Talk to anyone savvy with Pakistans capital markets, and you
e likely to hear a common complain - the missing link of an active corporate debt market.
According to a research by the Management Development Institute, India, the world corporate debt market constituted 85 percent of the total global GDP in 2008. In contrast, it is less than 2 percent in Pakistan at the moment, standing under $3-$4 billion.
A recent innovation in Pakistans underdeveloped debt market, however, is the introduction of the Engro Rupiya Certificate by Engro Corp.
While the rates offered by the instrument may not be the most competitive in the current macroeconomic environment of monetary tightening and rising inflation, the step taken by the conglomerate is certainly in the right direction.
A prominent aspect of the issue is the aggressive pursuit of the yet untapped retail investors, a note-worthy feature in a market dominated largely by institutional investors.
Finding feet in a relatively nascent market of largely unaware retail investors required a hefty marketing bill of Rs0.2 billion for Engro, which is 5 percent of the total debt being raised by the firm.
Though an enormous marketing budget has been mobilised, the stride is aimed at establishing a sound brand identity for the company amongst retail investors in order to facilitate it in raising capital.
Currently, a major impediment to the domestic corporate debt market is the governments National Saving Schemes (NSS). The rates on these instruments are generally competitive to those offered by fixed income mutual funds and banks time deposits. Plus, being almost free of default risks, with better liquidity, NSS seem to attract an average investor more.
While the SECPs lengthy and cost-consuming procedures can be partly blamed for an underdeveloped debt market, a general lack of awareness amongst retail investors puts corporate debt instruments at another crossroad. However, aggressive marketing campaigns such as the one mentioned above can help address this issue.
A spillover effect of a more active corporate debt market will also be seen on bank credit to small and medium size enterprises, which has been crowded out by loans to first-tier companies and the government.
When companies start issuing commercial paper for the short-term and bonds for the long-term needs, it will widen the scope for banks to lend to small and medium sized businesses.
"What happens in Pakistan is that when a large AA rated company needs financing, it goes to an A-rated bank and takes a loan. In the outside world, an AA-rated company would take it as an insult to go to an A-rated bank and ask for a loan," Amjad Waheed, CEO National Fullerton Asset Management limited, told BR Research in an interview earlier this year.
Engro has broken the ice for this area of Pakistans capital market, particularly by cornering the market of retail investors. One hopes other corporations will tread on this path and help the local capital market reach the desired sophistication.