Finally, the PTI economic team has put in motion its plan for Eurobond and Sukuk bond issuance. According to an advertisement, the related bids are expected to be submitted by October 14, following which it will take 4-6 weeks to issue the bonds. Hence, expect the bond issuance to be somewhere in December 2019.
The timing is not bad, given the current global financial market conditions. As for the US treasury bills, rates (benchmark) are falling, with the Fed expected to continue down the easing path. This might help Pakistan lock in better rates for 5-year and 10-year bonds. The economic team has softly committed with the IMF on government’s external financing from private investors. That number is targeted at $1 billion for FY20. Expect that number to increase in the coming years.
That external financing amount is not confined to Eurobonds and Sukuk bonds – foreign portfolio investment (hot money) is also a part of it. Thus far this fiscal, the government has raised around $150 million in T-Bills under foreign portfolio investment. And as per SBP, this number is nothing compared to the potential. However, a few circles fear about the nature of these funds, which might not stick around for long.
In case of bonds from the international capital market, the amount is to be committed for certain period of time (5 to 10 years, usually). Also, this one-time effort can reduce the day-to-day management of portfolio investment. Pakistan had last issued Eurobonds and Sukuk bonds at the end of 2017 – right after the exit of Dar, under the Miftah regime – raising $2.5 billion ($1.5bn in 10-year Eurobond at 6.875% and $1 billion in 5-year Sukuk at 5.625%).
The need to raise funds from capital market could not be as pressing as it was in 2018 and for the most part of 2019. During those times, the SBP foreign reserves were dwindling and government was asking for help from all its friends and allies. But ex-finance minister Asad Umar did not take the route of international capital markets at the time when he was supposedly working on some Plan B (in case the IMF funding wasn’t sought).
But Hafeez Sheikh was clear from start and went to the Fund programme right away. Though he has taken a few months to reach the capital market, it’s the right thing to do. Fresh off a promising IMF mission at home, with all but one quantitative target that needs to be met for the first review, the finance ministry might fight the international debt capital market more receptive now.
What should be the size of the issue? Well, the government should target an issue of at least $2 billion – a billion dollar each from the two bonds. This would help create a fiscal buffer and also help in the reserve-building exercise. Also note that there is $1 billion Sukuk from 2014 (issued at 6.75%) is maturing later this December. That much amount has to be raised just to replace this debt.
If the Q-block gets good rates, the government should not shy upon issuing even higher amount, as the timing is good, global rates are low and liquidity is being attracted towards emerging markets. The need is to hire good financial advisors and to give them decent incentives to even sell more for higher tenure. If Argentina, a defaulter of couple of times, can raise money for 100 years, Pakistan can certainly do better.