Pakistan has added to its debt - but this one may not be as bad a deal

Country raised $2.5b through bond issuances at a rate in line with expectations

KARACHI: Pakistan has just borrowed $2.5 billion from international investors, adding almost another percentage point of liability in relation to its GDP, and taking overall external debt burden beyond the $85-billion mark. But the mood wasn’t sour in Islamabad.

The country raised $1.5 billion via a 10-year Eurobond issue at 6.875% and another $1 billion through a Sukuk at 5.625%.

Officials were pleased and the country’s stock market reacted positively, increasing 0.85% on Thursday. Some argued adding debt is hardly something to be pleased about, while others said the bond yield meant a good bargain.



The amount comes at a time when pressure on Pakistan’s foreign exchange reserves has increased, and noise over an imminent balance of payments crisis has gotten louder. With the current account deficit having already widened 122% in the first four months of the current fiscal year, amounting to $5.01 billion, talks of a bailout and debt repayment issues have become more common.

So how come a country, rated ‘B’ by ratings agencies for investment purposes and plagued by political instability as well as economic turmoil, earned such a good deal?

“The general view on the potential of the economy is still quite positive,” said Zain Zaidi, director in the loans and acquisition finance team at Citi, and responsible for all syndicated loan financing in the Middle East, Egypt and Pakistan.

“We led a transaction for the government in which we raised $542 million, primarily from Middle Eastern and Asian investors. There were other transactions just preceding ours. So there was a significant appetite for Pakistan credit including a number of new investors.

“So people are certainly buying into the Pakistan story. We were finalising some funding on the day the Supreme Court made the final Panama Leaks decision. Although it was negative news, investors went ahead and funded the transaction. So I think fundamentals of the economy are still intact.”

Zaidi’s comments came during a media meet-up in London earlier in November, ahead of the bond issue. But the low yield and significant appetite for Pakistan credit remained even after a devastating weekend for the government that saw religious protests turn violent and macroeconomic position continuing to remain worrying.



“This has nothing to do with the economy - international investors are hungry at the moment,” said Dr Ashfaque Hasan Khan, a noted economist and dean at the National University of Science and Technology (NUST). “There is excess liquidity available in global markets and prevailing interest rates are in the range of 1-2%. So a bond issue is a good avenue for investment, even for a B-rated country.”

Khan, however, said that given Pakistan’s need for dollars it will not be a bad idea to float more bonds in the next few months.

“Pakistan will need around $26 billion during 2017-18. This includes a (projected) $18-billion current account deficit and $8 billion worth of debt-related payments. The shortfall will only be half met through traditional sources of borrowing including the World Bank, Asian Development Bank and others.”

When asked if the International Monetary Fund (IMF) could be the avenue for financing needs, Khan was vehemently clear. “Pakistan should avoid going to the IMF at all costs because it will have serious implications for the country this time around.”

Published in The Express Tribune, December 1^st, 2017.

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