Financing for corporations in Pakistan is becoming increasingly difficult. Fiscal slippages, the delay behind the latest IMF money and other pending funds, are also crowding out corporations from bank financing. In such a scenario, the development of debt markets in Pakistan may provide a new avenue for companies to quench their monetary thirst.
Pakistani corporate bond market is under $3-4 billion, which is negligible compared to the size of its stock market of around $30 billion. This comes in stark contrast to global standards, where bond markets are several times larger than the stock markets.
This has made it difficult for companies to finance their expansion, whereas internationally, large corporations rely on the strength of their balance sheets to issue commercial papers and bonds. These papers are then bought primarily by mutual and pension funds as investment instruments.
In Pakistan, however, even AA-rated companies have to go to banks for their financing needs, which crowds out the small and medium size businesses from bank credit.
A big impediment in the growth of the bond and commercial paper market is that the SECP takes months to grant approval for their issuance, whereas taking a loan from a bank is much quicker. Even in cases of launching mutual funds, sometimes it takes six months to launch a vanilla product due to bureaucratic hurdles at the SECP.
Since the bond/TFC gets a rating before the firm applies to the SECP for listing purposes, the regulator should take days instead of months to approve the issuance of such securities. As a consequence, companies have resorted to issuing privately placed TFCs; however, since these are not listed they don add to the development of bond market.
Another problem is that, although there is a bond trading system in place, BATS, at Karachi Stock Exchange, it has not yet been made a mandatory channel for bond trading.
Unless the SECP issues instructions that all bond trades have to take place through BATS, there will be problems in terms of price discovery, transparency, liquidity, efficiency and documentation.
The third impediment is that the government continues to offer very high rates on National Savings Scheme, which is crowding out the private sector and encouraging investors to lend to the government rather than the private sector. This creates hurdles in private sector capital formation.
The bottom-line therefore is that debt market is the missing element in Pakistans capital markets, and that there is a need for a substantial rise in corporate financing via issuance of commercial papers and bonds - something which can help accelerate economic growth of the country.
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