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Finally, Eurobonds have been issued, after waiting in the pipeline for a year or more. Over the past few months, Islamabad had been waiting for the IMF program to resume. Thus, offering took place right after. However, the exit of the FM just a day before the offering took markets by the surprise and highlighted the disconnect in fiscal decision-making. Nevertheless, the finance team succeeded in fetching a decent amount. Government is planning to issue international Sukuk next week. The game is on.

Many are of the view that the participation in Euro bond issue ($5.3 bn, 2.2 times the issue size of $2.5 bn) may have been better had the FM change waited. Others are of the view that the government missed ideal market conditions by not going for the issue a month or two earlier. However, it was able to fetch better price than the indicative, considering the credit rating.

In the last few weeks, US treasury yields have moved up, while third Covid wave is becoming more prominent. Thus, government would not have been able to generate better interest as have other economies in recent past. Same is the story of the spreads over US treasury bills. At the beginning of 2021, Egypt (a similarly problematic economy) was able to raise $3.8 billion (total participation $16.5bn) at much better rates than Pakistan.

Having said that, it was a much-needed issue. Critics insist that there is little reason to jubilate, considering it is more foreign denominated debt at the end of the day. That is correct as building reserves through export earnings or foreign direct investment (FDI) is a better option. But in their absence, market-based debt is a better option over all other forms. And given Pakistan’s frequent twin deficit crisis, long-term debt is better than short term debt.

The government was able to raise $2.5 billion in 5Y,10Y and 30Y bonds. Government fetched $1 billion in 5Y bond at a cut-off yield of 6 percent – against the indicative yield of 6.25 percent. The spread over US treasury is 508 bps. $1 billion was fetched in 10Y bond at the rate of 7.375 percent against the indicative yield of 7.5 percent. The spread over US treasury is 563 bps. Lastly, 10Y bond was issued at a spread of 454 bps. This means the pricing could have been much better.

However, given Pakistan is already offering 7 percent return to Roshan Digital Accounts (RDA) for 5Y dollar, 5Y Eurobond at 6.0 percent is surely a better deal. This also indicates the return offered to RDA holders is higher and needs to be revisited and aligned with Eurobond yield.

This is the second time Pakistan has issued 30Y paper. $500 million were raised at cutoff yield of 8.875 against the inactive yield of 8.875-9 percent. The last time 30Y issue took place was in 2006 when the government raised $300 million at the rate of 7.875 percent. The spread over US T-Bills was 311 bps against 647 bps today. Based on this, it seems that the bond is expensive.

Right now, Pakistan’s total global capital market debt stock including the latest issue stands at $7.8 billion. $1 billion will mature in Oct 2021 and another $1 billion in Dec 2022. The issue is at a slight premium to secondary market yields of Pakistan’s existing bonds.

The yield curve is becoming steeper – the difference between 5Y and 10Y bond is now 1.375 percent, and the gap between 10Y and 30Y bond is at 1.5 percent. The yield curve was even steeper for Egypt – which received $700 million in 5Y at 3.875 percent, $1.5 billion in 10Y at 5.875 percent, and $1.5 billion in 40Y bond at 7.5 percent.

Placing the international bond (USD dominated) in context of Pak Rupee bonds (PIBs), the yield curve in domestic debt market does not look as steep. The difference in PKRV between 3Y and 10Y paper is 105 bps and between 5Y and 10Y paper, 56 bps. Looking at the steeper yield curve in USD market, chances of long-term yields in domestic market coming down look thin.


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