‘Pakistan to raise $1.5 billion via Eurobond, sukuk’

ISLAMABAD: Pakistan’s federal cabinet has approved borrowing of up to $3 billion via a Eurobond and sukuk, but the government would “most likely” raise only $1.5 billion, a senior Pakistani government official told Reuters on Tuesday.

Pakistan is likely to split the fund raising equally between the Eurobond and sukuk depending on the rates, the official added. Reuters had reported in August that Pakistan was looking to raise $500 million to $1 billion in debt via an Islamic sukuk bond or a Eurobond later in the year.

The fund raising is critical for the country, which is battling to stave off the pressure of balance of payments due to the dwindling foreign currency reserves and a widening current account deficit in the $300 billion economy.

Pakistan’s foreign exchange reserves decreased by $137 million to $13.541 billion in the week ended November 17, compared with $13.678 billion in the previous week, latest central bank data showed.

The central bank said challenges of near-term balance of payments persist, but it was hoping the recent improvements in export numbers, hikes in foreign direct investment and other financial inflows would help contain the pressure.

The balance of payments pressure is largely due to imports of machinery and other Chinese goods on the back of China’s $57 billion infrastructure investment as part of the Beijing-funded Belt and Road infrastructure initiative stretching to Asia, Europe and beyond.

With foreign reserves dwindling, some analysts say Pakistan may need an International Monetary Fund (IMF) bailout to avert a balance of payments crisis similar to the one it suffered in 2013, when it sought IMF help.

Our correspondent adds: Pakistan is close to concluding investor road shows for the sale of up to $3 billion sovereign debt in the international capital markets, with most of the demand expected from the US investors who could show strong appetite for long-term conventional bonds, experts said.

The government intends to sell a Eurobond with maturities of 10 and 30 years and five-year sukuk, probably after the roadshows end on Tuesday. The pricing of the bonds is expected on Wednesday.

Roadshows are developed on the advice of the advisory group that in turn takes into account the prospective lenders in different markets. “Based on the previous issues, it seems two thirds demand for the new dollar-denominated bonds to be floated by Pakistan could be generated from North America where the investors are much interested in emerging market bonds in search of higher returns on such issues,” said a financial analyst.

“The 10 and 30 years Eurobonds would be the first priority for the US investors with some appetite for sukuk bonds, as the investors find the emerging market debt most attractive, especially in the presence of low interest rates in the US and the Europe.”

The investors from Europe, Middle East and the Far East debt markets could evoke moderate interest for the new bonds. The Gulf debt market looks highly deepened for new allocations such as sukuks.

Analysts find harder to assume the pricing of the potential issues, but believe it could be as high as 5.5 percent for sukuk and 7.5-8.5 percent for Eurobonds due to increase in external and political risks.

Pakistan's credit-default swaps surged in late October and lingered near their highest level since June, according to the government official. The price of five years credit default swaps for the country’s sovereign debt stood at 331 basis points as on November 20, Bloomberg reported.

The 2016 five-year sukuk issue raised $1 billion at 5.5 percent which was an affordable pricing for the PML-N government. However the $500 million worth Eurobond with a maturity of ten-year issued at 8.25 percent in 2015 was considered a highly expensive cost of borrowing by the government.

Currently, the international road shows are underway, and the transaction will be complete in New York. Prime Minister’s Special Assistant on Economic Affairs Miftah Ismail is leading the Pakistani team for holding roadshows in Dubai, Singapore, London, Houston and New York.

US financial service firm Standard and Poor’s (S&P) has already assigned preliminary ‘B’ long-term rating to the proposed dollar-denominated sukuk issuance by Pakistan, betting on the country’s repayment ability. S&P also assigned ‘B’ long-term foreign currency rating to the proposed benchmark sized US dollar-denominated senior unsecured notes to be issued by the country.