After bonds, what’s next?

It’s as if Dar’s exit was welcomed by international debt market. Just days after the finance czar’s ouster, the country has been able to fetch, by far, the best rates for Euro bond in the third issue of the current PMLN regime. In case of Sukuk, the yield was marginally higher than the previous issue. The country raised $2.5 billion including $1.5 billion in 10-year Euro Bond at 6.875 percent while $1 billion was raised through a 5-year Sukuk at 5.625 percent.

What does a good response from international capital market really imply? Does it mean that the world is discounting political chaos at home? Do the global pundits not share the concerns of domestic economists on the rising balance of payment woes? Or is it just that the global liquidity position is currently better for issuing bonds?

All the above-mentioned factors have perhaps contributed in getting better than expected results in the bonds issue. The timings are right as the receptiveness of global debt markets is evident from the fact that countries like Argentina and Iraq have recently raised bonds at better yields.

BR Research had advocated for reaching the global debt market, seeing the response to other economies, prior to the government decision. (For details, read “options for Dar and Abbasi” published on 30th August, 2017).

And the results are even better than analysts and economists expected. In case of Euro bond, the yield for 10-year paper is 137 basis points better than the previous issue in Sep 15. That was a bad time to hit the international debt market as not only country’s economic growth had not gained momentum by then but also the global liquidity position was not conducive.

Anyhow, the rate this time is as good as it was in 2006 issue. Does this mean that economy is doing as good as it was in 2004-07 era? Perhaps, the growth momentum is more broad-based than it was in the Musharraf era, when growth was primarily consumer-driven. But this time around, add infrastructure spending to the consumer boom that has expanded the growth horizon. However, the downside this time around is that economic institutions have been weakened by Dar and company. And without strengthening institutions, no momentum is sustainable.

In the case of Sukuk, the yields are 12 bps higher than the Oct 16 issue. The economic and political perceptions were at best then. The reserves were at their peak while the Nawaz Sharif premiership was un-challenged. The stock market was booming and the positivity was in the air. Now, the political noise in the country is at its peak, not seen since 2008, while the economy is facing sharp increase in current account deficit.

Seeing all these changes since Oct 16, getting such good rates are commendable. Kudos to PM Abbasi and his team! Having said that, the economic management should not get complacent. The government must now work on how to maintain the economic growth momentum without letting the reserves fall to worrying level.

With $2.5 billion inflows, the import cover will increase from 3.9 months to 4.4 months; but given the large CAD, the gains will soon be evaporated without getting more loans or other form of foreign exchange. The need is to retire a little over $1 billion raised in short-term borrowing this fiscal year so far and the team should work hard on increasing the foreign direct investment, which is slowly gaining momentum.

The need is also to continue the work on curbing non-essential imports.

The government should also curb petroleum demand by enhancing taxes on petrol. With money coming in the fiscal kitty, the government should make the textile package real and let the refunds and incentives proceed to exporters swiftly.

But even after doing all these things, with such a high import base, higher growth in exports and FDI may not be able to reduce the reserves’ fall too much.