Development of corporate debt market

Delivering his keynote address at a conference on "long-term Debt Financing - Issues and Challenges for Pakistan" on 5th March, 2012, the Governor, State Bank, Yaseen Anwar, revealed that a joint task force of the SBP and Securities and Exchange Commission of Pakistan (SECP) had been set up to draft a framework for establishing a vibrant corporate debt market. The tasks of this body would include the development of guidelines for shelf registration of corporate debt, collaboration with credit rating agencies to streamline the issuer and instrument rating processes, and co-ordination with provincial authorities for rationalisation of stamp duty on transfer and issuance of corporate debt instruments. In addition, the task force will collaborate with the FBR and GoP to rationalise tax treatment of corporate debt instruments to encourage the corporate debt market. A vibrant corporate debt market will not only facilitate the provision of diversified investment avenues for various stakeholders but also help improve the saving ratios of the country. It was a matter of concern that the size of the listed corporate debt market in Pakistan was less than one percent of the GDP. Development of a corporate debt market would provide savers with an alternative to bank deposits as it was recognised that the presence of such markets was a significant source of competition for the banking system. Highlighting the role of the corporate debt market in the present conditions in Pakistan, the Governor remarked that in an uncertain macro-environment, banks were reluctant to advance long-term loans to the private sector and often resorted to short-term lending. This implied that in the absence of a corporate debt market, firms would find it difficult to raise funding for long-term investment projects. It was also pointed out that in most countries, the government as the largest issuer of debt securities provided the volume required for a liquid secondary market. In Pakistan, however, PIBs were unable to serve this purpose for two reasons. Firstly, the market was not sufficiently liquid and secondly, there was no benchmark for private bonds that were issued for a tenor of between 5 and 8 years since PIBs were only available for maturities of 5 and 10 years. The Governor suggested that the process for primary issuance of corporate debt should be simple and fast-track so that a corporate body could raise funds quickly when conditions are favourable for debt issuance. Although there is nothing basically wrong with the observations of the Governor, yet it is quite clear that the task force set up by the State Bank and the SECP would not focus on the main factors responsible for hindering the growth of a vibrant corporate debt market but only deal largely with procedural issues to facilitate its working. It is all very well to highlight the importance and develop guidelines for shelf registration of corporate debt and collaborate closely with the provincial governments, the FBR and GoP to rationalise stamp duty, tax treatment etc but such initiatives can only provide some relief to the investors and remove only minor irritants from their decision-making process. Even if such issues were deemed to be important, these could have been taken up either by the SECP or the State Bank with the concerned agencies and resolved without forming a joint task force. The Governor has also talked about the lack of benchmark for private bonds for a tenor of between 5 and 8 years due to the non-availability of PIBs for these maturities. In our view, this was not such a big issue in the development of the corporate debt market or, even if the State Bank considered it important, it could have tried to find a solution by consulting the government at an appropriate forum without forming or involving the task force. Anyhow, the real impediments to the development of a vibrant corporate debt market in Pakistan are a dismal rate of savings in the economy and the inability of the corporate sector in guaranteeing a handsome rate of return to the investors vis-à-vis other avenues of investment. Other factors influencing the development of the corporate debt market could be the uncertain economic and political situation in the country, including concerns about the security situation, provision of necessary infrastructure, stability in prices and exchange rate etc. If the influence of these elements was so pervasive, the issues to be taken up by the task force can hardly make any difference on the development of the corporate debt market. Even the establishment of DFIs and NBPIs, supposed to be a catalyst in accelerating the process at some stage, have failed to make a visible impact. A failed effort by the government to sell T-Bills through the NSS is a rough indication of the interest of the households to hold other kinds of debt when sovereign debt with guaranteed high returns at regular intervals is easily available. The fact of the matter is that our banking system is fairly developed. However, our banks would not like their deposits to be cannibalised by others. The SBP needs to reach retail investors, ie, the same bank clients directly by providing direct access in the auction of government securities. The present system requires non-banks (corporates) to bid through primary dealers all of whom again are bank clients. Growth of the corporate debt market is dependent on the economy of the country being on a growth trajectory and the business community and public at large having the necessary confidence in the overall system. Therefore, it is time for the authorities to change their priorities and emphasise on those aspects which are really important to address the fundamental issues affecting the growth of the corporate debt market at this stage. Copyright Business Recorder, 2012