Pakistan may soon float the much-delayed Eurobonds after a stay granted by a World Bank tribunal against $6 billion penalty in Reko Diq case removed a key obstacle, providing a short window of opportunity to Islamabad to cash global markets’ sentiments.
The Ministry of Finance has started exploring the possibility of floating the sovereign bonds in the international capital markets within a couple of months, highly placed sources told The Express Tribune.
In budget estimates of 2020-21, the government has included $1.5 billion borrowings by floating the sovereign bonds.
They said one of the reasons for not venturing into the debt markets in the last fiscal year was the fear of attachment of Pakistan’s sovereign bonds by Australia's Tethyan Copper Company (TCC). The TCC had won a $5.9 billion award against Pakistan for not fulfilling its investment related commitments.
On August 20, Special Secretary Finance Mohsin Chandna said that due to international compulsions, Pakistan could not float the Eurobonds. But he had not explained these compulsions.
But the World Bank's International Centre for Settlement of Investment Disputes (ICSID) this week granted a stay on the enforcement of the penalty of nearly $6 billion imposed on Pakistan for its decision to deny a mining lease for the Reko Diq project to TCC.
In July last year, the ICSID had slapped the penalty on Pakistan for its 2011 decision to deny the mining lease to the TCC – a 50-50 joint venture of Barrick Gold Corporation of Australia and Antofagasta PLC of Chile.
Later, the TCC approached courts of five different countries for the enforcement of the penalty imposed on Pakistan.
The Express Tribune’s exclusive story published on Saturday revealed that the ICSID has placed a condition of providing bank guarantees equal to 25% of the reward money while granting a stay.
The finance ministry can provide bank guarantees either through the National Bank of Pakistan or by directly engaging a foreign bank. But the International Monetary Fund has also set limits on provision of new sovereign guarantees. The IMF will have to relax the condition since Pakistan was under obligation to fulfil ICSID interim decision.
Window of opportunity
The finance ministry sources said that it was high time for Pakistan to cash the opportunity available in shape of the stay order. Pakistani sovereign bonds, which were floated earlier, are being traded at premium in the secondary capital markets, they added. Pakistan may get a good deal and the cost of borrowing should not be high compared to previous transactions, they added.
Another positive aspect was that excessive liquidity was available in the global markets and investors were also willing to invest money in the emerging markets’ debt instruments, they added.
The investors’ sentiments may also change with the outcomes of the US Presidential elections, scheduled for November 4, limiting the window of opportunity for Pakistan.
The sources said that this time the State Bank of Pakistan was also in favour of floating the Eurobonds.
However, in order to fast track the transaction, the government may have to seek relaxation of Public Procurement Regulatory Authority rules to limit the time period for hiring financial advisers.
In October last year, top European, American and Chinese banks submitted bids for being hired as financial advisers to float the sovereign bonds. But the government did not sign the contract after it changed the decision to float the bonds.
The government had delayed the launch of $3 billion Eurobond last year and met its financing needs through short-term expensive foreign commercial loans and hot foreign money, being invested in the government debt securities.
This adversely affected the average time of maturity of the external debt that decreased from 7.5 years in 2018 to 7.1 years this year due to the government’s reliance on short-term foreign commercial loans.
In two years, the Pakistan Tehreek-e-Insaf (PTI) government added 45% to the debt stock, exposing it to severe criticism. The total public debt as of June 30, 2020 increased to 87% of gross domestic product (GDP), up from 72.5% two years ago.
The PTI government has not yet tested the international capital market and has been delaying the launch of sovereign bonds, including Panda Bonds, which it wanted to float in China.
Another key factor that can help Pakistan get a better deal in the international capital markets is the revival of the stalled IMF programme. However, the sources said that the IMF programme may not be back on track in next couple of months.
The sources said that it seemed that the IMF may not club the second and third reviews of the programme, as the conditions for merging both the reviews were very tough. They said that if all went well, the IMF may call a board meeting somewhere between November and December for the approval of the second review that is pending since February this year.
Pakistan could not receive two loan tranches from the IMF, totalling $1 billion, after the programme derailed in February this year.
Another factor that delayed the Eurobond transaction last year was the SBP’s preference for hot foreign money. In order to attract the hot foreign money, the SBP set the interest rate high at 13.25% till March 17.
But as against cumulative inflow of $3.64 billion into government securities, the foreign investors withdrew $3.2 billion by end of last fiscal year, leaving Pakistan with only $466 million, showed SBP’s statistics. The process of outbound flight of the hot foreign money has not yet stopped.
In this fiscal year, Pakistan received only $54.8 million hot foreign money but the withdrawal stood at $139 million, according to the SBP.
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