Deutsche Bank has said PSO may face problems in dealing with oil businesses in the Middle East if it continues defaulting on L/Cs issued for oil import. PHOTO: COMPANY WEBSITE
ISLAMABAD:
Prime Minister Mir Hazar Khan Khoso has been informed that Pakistan State Oil (PSO)’s creditworthiness has been questioned in the global financial market, and that at least one leading international bank has expressed serious concern over a default on Letters of Credit (L/Cs) issued by the oil marketing giant. It is feared that PSO’s inability to pay its dues may have serious implications on the creditworthiness of the country.
According to sources, Deutsche Bank has written a letter to PSO over a default on a L/C, implying that the latter is losing its credibility in the financial market. “PSO may face problems in dealing with oil businesses in the Middle East if it continues defaulting on L/Cs issued for oil imports,” sources said while quoting the letter. They added that this was an alarming development for the state-run giant, which is on the brink of defaulting on other international payments due to the burgeoning circular debt in the nation’s power sector.
“Yes, the bank wrote a letter to us at a time when an oil supplier’s ship was stuck at the Karachi port and PSO was not able to meet its obligations due to a shortage of funds,” a senior PSO official told The Express Tribune.
According to sources, the prime minister was presented with an unflattering appraisal of the energy sector in a meeting held on April 4, 2013, during which the issue of oil supply to power generating units was also discussed. The prime minister was informed that PSO had defaulted on its L/C commitments and payments to the Kuwait Petroleum Company (KPC) due to irregular payments by the power sector.
The prime minister was also informed that PSO required around Rs41 billion per month in order to continue supplies of 16,000 tons of fuel oil per day to the power sector, out of which Rs5-6 billion would be on cash sales basis, while Rs35 billion would be released on account of credit sales. It was also informed that the Ministry of Water and Power had agreed to pay Rs11.3 billion during the month of March, but had been unable to make the payment so far.
The petroleum secretary sought a firm commitment from the finance and power ministries for the timely payment of future L/Cs issued during April through May. He also clarified that in case of enhanced supplies in the summer season, when electricity demand touches a peak, additional funds will be required; including the availability of additional credit lines from the National Bank of Pakistan worth Rs55 billion.
He also said that the Ministry of Water and Power did not have the ability to pay for fuel supplies, and the Ministry of finance would therefore have to do its part in ensuring timely payments for fuel oil procured for the power sector. He observed that the patterns of payments made by the power sector to PSO reflected that the Pakistan Electric Power Company was paying only 13% of its dues, while the remaining 87% was being arranged by the Ministry of Finance.
Published in The Express Tribune, April 21st, 2013.
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COMMENTS (21)
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@Faiza: Thanks I was not aware that it was a confirmed sight LC. You are correct then that there would be no FX involved in retiring the LCs but even so, there can be a default in retiring the LCs with local banks. YEs the government CAN print money to pay PSO who can pay local banks and it has done so repeatedly adding to the fiscal deficit but I guess but given the current level of fiscal deficit and knowing that an IMF loan is almost inevitable in the near future they may want to have some semblance of fiscal order so it appears that PSO does not get funds in the amount it requests leading to technical defaults.
The attached url shows that foreign banks like Standard Chartered and Citi have refused to open LCs for PSO and also PSO has defaulted on payments to suppliers. http://tribune.com.pk/story/514526/teetering-on-the-edge-pso-defaults-on-payments-to-international-suppliers/
The odd part about this article is that it talks about alarm bells ringing in PSO. The question is when are alarm bells not ringing because of PSO? Practically every week we hear about PSO begging the finance ministry for a fresh injection of cash. PSO is on life support because of the circular debt!
@gp65@weird......The story doesnt add up...PSO imports oil under confirmed sight LC...These LCs are established by local banks and confirmation is added by foreign banks...there is no question of default since LC payment has to be made by Banks....and since the beneficiary gets payment on time, its not technically a plausible scenario that beneficiary's bank would threaten PSO in any way
@Muneer: "LC is an instrument issued by a bank that guarantees payment to the supplier after delivery has been made. Default on LC is effectively a default by the LC issuing bank. How can PSO default on LC?"
The default here refers to PSO's inability to repay the LC issuing bank and the expected outcome would be that foreign banks would stop issuing LCs and PSO would start having to import oil on a cash basis.
@abdussamad: "Pakistan’s international credit rating is junk so what difference does it make if PSO keeps on defaulting? Pakistan’s rating can’t get any worse!"
You are correct that it wil not make a difference to PAkistan's credit rating. What will happen however is that no foreign bank will issue a letter of credit to PSO and PSO will have to buy all oil on cash basis instead of credit basis. The cash too would have to be in foreign currency not rupees. Due to the precarious balance of payment position it means if things continue on current rtajectory, the amount of oil Pakistan can buy will plummet and in turn the load shedding will get worse than it is now.
@Touseef Ahmed: Read first paragraph again:
Also PSO's creditworthiness is always less than the country's. No company has a higher credit rating than the sovereign.
Remove all non development programs .
The irony is that most of the population is not educated and they don't even understand basic economics. The rulers, by giving them Rs.1000 or maybe more encourage them to stay this way, so that they(rulers) keep on looting the country without any resistance from public. If this had happened in any developed country, its people would have hanged the rulers by their neck!
Wake up Pakistan
The need is to finish the circular debt and to understand the need to pay the bills. Most of the big institutions and big consumers are either not paying bills or they are some how involved in theft of electricity. Line loses figures are enormous and not understandable. I think power companies should be buying oil directly from international market. PSO should be out of equation. The government should understand the limits of their spending.
@Muneer: This means that PSO has defaulted on the payment to the bank. The bank that issues the LC does so under the assumption that the buyer would pay it back.
@abdussamad: It is not about Pakistani rating its about PSO's rating. Decline in PSO credit rating means you are not getting loan or fuel on favor able basis. As a result, PSO also going to be a whhite elephant like PIA and railway. So no need to be happy its a worst condition. Praises for PPP. PPP khapay khapay khapay.
LC is an instrument issued by a bank that guarantees payment to the supplier after delivery has been made. Default on LC is effectively a default by the LC issuing bank.
How can PSO default on LC?
The state is failing or has failed?
@Iqbal Well said.
@Iqbal: You are absolutely right. States in history disappear when their inhabitants no longer are committed to it. They collapse over a period of time and are swallowed by neighbours. Pakistan is passing this time period. All bluster and its military might will count for nothing in the end.
@Iqbal:
Yes but PAK nuclear weapons to protect itself from Sweden. Be thankful for something.
Pakistan is testing Missiles every other month so why care about Credit Rating.
Zlufikar Ali Bhutto’s famous words are going to come true soon. “Pakistani’s will eat grass if need to be, but we will have nuclear weapons”.
Only a few days back on a KP Refinery story I had commented that PSO could not finance its trade receivables, who in their right mind would finance a bankrupt company's refinery project. Most of my compatriots comments were gung-ho on the news, or as they say "Hor Chuupoo". I know it is difficult to "curb your enthusiasm" on such futuristic ideals, but we have to come back to reality. The nation is bankrupt, we need to pay taxes past and present, cut all non-development expenditure, reduce all types of energy consumption and tighten our belts to keep the country from going under. Does anyone seriously believe otherwise??
The credit rating of Pakistan as given by Moody's is Caa1 (lowest Pakistan has got) and Fitch has given it B-. http://www.tradingeconomics.com/pakistan/rating For those who don't understand economics it means that Pakistan is technically bankrupt and the outlook is very bleak. Part of the problem is that there is no inward investment and too much is being spent on defence which it can ill afford. I suspect in few years time the credit agencies will not bother rating Pakistan because it will not be on the map.
I was hearing Raja Parvez Ashraf, he was being interviewed by an anchor of famous talk show. When that anchor asked him, why should anyone vote for you? He said, we have achieved everything for this country, development, infrastructure, education and all that rhetoric. Least i can say is, i was in a state of shock when he was saying all that.
Pakistan's international credit rating is junk so what difference does it make if PSO keeps on defaulting? Pakistan's rating can't get any worse!