Thursday May 30, 2024

‘Sukuk issuance to lure foreign investment’

By our correspondents
October 07, 2016

KARACHI: The re-entry of Pakistan into the international Islamic bond market after a gap of two years with the issuance of one billion dollars Sukuk will help the country bolster its external account position, an analyst said on Thursday. 

Analyst Saad Hashemy at Topline Securities Limited said the country’s ability to raise funds from the global financial markets at the historic lower rates “shows investors’ optimism about the economic prospects.”

“This will greatly help allay concerns of the funding of external accounts going forward,” Hashemy said.

The government on Wednesday raised $1.0 billion through the issuance of five-year dollar-denominated Sukuk at the historic low rate of 5.5 percent. The investors across the world showed interest in parking around $2.4 billion in the bonds.

According to the breakup, 38 percent of the total bids were received from Europe, 27 percent from North America and Middle East and North Africa, six percent from Asia and the remaining from other parts of the world.

The country recently concluded a three-year $6.7 billion loan program of the International Monetary Fund (IMF). 

Hashemy said the external flows will lessen the pressure on the widening current account deficit.  

The IMF forecast the current account deficit at 1.8 percent of GDP for the current fiscal year of 2016/17 as compared to 0.9 percent of GDP in the last fiscal year.

In December 2014, the government floated 5-year Sukuk at 6.75 percent and raised one billion dollars. In 2015, it issued 10-year Eurobond at 8.25 percent and racked up $500 million.

The securities analyst said the fresh floating will reduce the country’s risk premium by foreign investors. “A 125 basis points reduction in the country’s risk premium can potentially result in valuation upside of around 10 percent,” he said.

Pakistan’s credit rating has remained stable or improved during the last few years. 

International credit rating agencies Moody’s, Fitch and Standard & Poor’s (S&P) rated Pakistan as B3 (stable), B (stable) and B (positive), respectively in their last ratings. 

 “The latest issuance of Sukuk is a strong indicator of Pakistan’s rating improvement in future,” Hashemy said. “The issuance could have been at an even lower rate, had the political tensions with India not flared up.” 

Topline Securities Limited, in its report, said countries with similar ratings floated their securities at around the same or higher yield. 

Some other countries with the similar ratings issued bonds at the same or higher yield. Egypt, with B negative rating from S&P’s, floated its 10-year Eurobond in 2015 raising $1.5bn at 5.875 percent. Similarly, Kenya’s (S&P: B+) 5-year and 10-year bonds worth $2.0bn were floated in 2014 at 5.875 percent and 6.875 percent, respectively. This year, Sri Lanka (S&P: B+) raised $1.5 billion in 5-year and 10-year bonds at 5.75 percent and 6.825 percent, respectively.