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The bond issue is one of many proposals that the government is seriously considering in a bid to deal with cash crunch and the runaway fiscal deficit amid lower-than-expected tax revenue collection, suspended foreign assistance and low foreign investment during the current fiscal year ending June 30. Other proposals include floating shares of state-run enterprises in domestic bourses and introducing new tax measures like imposing a flood surcharge, increase in the special excise duty rate, recovery of tax arrears, targeting non-filers of tax returns and broadening the tax base.
For floating the bonds, the government is mulling over two options – convertible bonds with the option of converting the paper into equity of the company later or exchangeable bonds backed by government guarantees.
High yield to win investors
“Exchangeable bonds supported by sovereign guarantees are comparatively better than convertible bonds as Pakistan’s external debt cost is not as high as that of the domestic debt. Though domestic economic and political uncertainties may have an impact, a higher return of seven per cent will be a source of encouragement for investors,” said Hamad Aslam, Head of Equity Research at BMA Capital.
Total debt of the country stands at around Rs9.5 trillion, of which domestic debt accounts for 52 per cent. According to reports, the cost of servicing domestic debt is significantly higher than that of external liabilities.
In 2005, Pakistan issued bonds in the international market at around six per cent. Currently, bond yield is around 10 to 10.5 per cent.
Aslam said the government has received offers from 10 international companies for appointment as financial advisers to the bond issue. In addition to that, it will have to hire local banks and financial institutions for serving as underwriters to the issue. “Bonds can be launched in a month by completing all these formalities,” he said.
Aslam was of the view that borrowing through securities is a better option than seeking money from the International Monetary Fund (IMF) which imposes its conditions on the government for releasing the money. IMF has withheld the last two installments of its $11.3 billion standby arrangement since May last year because of a delay in implementing key reforms like introduction of the reformed general sales tax, eliminating electricity subsidies and increasing petroleum product prices in line with the international market.
First assess market conditions
“The bond issue is a good plan which shows the government is going towards reducing its holdings in state-run companies,” said Atif Zafar, oil and gas sector analyst at JS Global Capital.
Zafar said the government will have to first assess global market conditions before issuing the bonds and will have to prepare a feasibility report. “We will have to wait for the right time because of the current global economic and political conditions,” he said.
A continuous people’s revolt against long-serving leaderships in the Middle East has shaken the region in the last two months during which Tunisian and Egyptian governments fell. Now the focus of people’s ire is on Libya and some activity is going on in Bahrain and Yemen as well. These political developments have hit the world stock markets and have sent commodity prices soaring.
“Yield on the proposed bonds depends on the domestic political and economic situation,” Zafar said, adding Pakistan’s current bond yield in the international market is around 10.5 per cent compared to the earlier average of 8 to 8.5 per cent.
The writer is incharge Business desk for the Express tribune and can be contacted at ghazanfar.ali@tribune.com.pk
Published in The Express Tribune, February 28th, 2011.
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