Govt gears efforts to test international appetite for Shariah-compliant papers

KARACHI:  The government plans to tap international investors’ appetite for the Shariah-compliant instrument this year by offering sukuk worth as much as $750 million for sale -- if the price is right.

The government, last month invited expressions of interest from banks to manage the sale and asked them to submit their interest by the last week of September. The finance ministry said the structure of the sukuk will be flexible and the issue will have a maturity of at least five years but did not give other details.

 Senior officials of the ministry of finance confirmed that the government accelerated its efforts to issue the foreign currency-denominated sukuks in the next couple of months to further shore up its reserves and for the repayment of the outstanding debts.

The government last raised $1 billion in five-year Sukuk bond in November 2014 but analysts termed the previous Sukuk issuance highly expensive compared with the local currency borrowing. 

“The interest rate or projected coupon on the bonds should be reasonable in context of ultra-low interest rates on the US treasury and LIBOR,” former finance minister Salman Shah said. “It’s the job of the fund managers to make upcoming issuances more exotic, attractive in terms of yields, but at the same time reasonable as far as coupon payment is concerned.”     

Shah, however, said it’s the right time to enter the global bonds market rather than later capitalising on such opportunities.

“The completion of the IMF (International Monetary Fund) programme and reclassification of Pakistan Stock Exchange to MSCI emerging market index would send a positive signal to the investors,” he added. “It could be a statement of support for the country and the investors.” 

Bilal Khan, an economist at Standard Chartered Bank said the country’s recently successfully concluded IMF programme and strong foreign exchange reserve position are potential tools to attract investors.

“… In general FX borrowing carries risks (but) Pakistan’s external debt burden is low and much of this is from official, bilateral or multilateral creditors so it has the room to expand commercial issuance,” Khan said. 

He said the inclusion of sukuks in the key global indices, on the margin, is also positive for any planned issuances. Recently, JP Morgan has decided to add $1 billion Pakistani Sukuk that is maturing in 2019 to its emerging markets indices.

Analysts said improved macroeconomic indicators and China-Pakistan Economic Corridor related activities are attracting positive credit ratings that could convince investors into buying Pakistan’s foreign currency-denominated and Shariah-complaint debts.  

Kashif Shah, managing director investment banking at Arif Habib Limited said the international market will welcome sukuks from Pakistan. “Ministry of Finance should aim to raise financing at the competitive rates,” Shah said. “Lower crude oil prices have dampened appetite of some Gulf based investors; however there should be an appetite for an issue of $750 million to $1 billion for Pakistan.”

But some economists are skeptical on the government efforts after rating agency Standard and Poor recently predicted that the complexity of sukuk issuance, uncertainty regarding US Federal Reserves’ policy revisions, and the government’s efforts to reduce financing needs in response to weak oil prices have and will continue to weigh on sukuk market activity.

Senior economist Ashfaque Khan believed that the country’s exit from the IMF program and weak capital and financial inflows has increased the risk for the global investors. “If Pakistan is to sustainably diversify sovereign borrowings from local currency to foreign currency, it will need foreign currency earnings to keep pace,” Khan said. “Here, the country’s declining exports is a key concern.”