The government has raised a relatively low amount of financing at Rs86 billion through the auctioning of five Sukuks at the Pakistan Stock Exchange (PSX), falling short of the Rs100 billion target. This shortfall is attributed to investors demanding a higher rate of profit following the International Monetary Fund’s recommendation for a further hike in the interest rate.
Earlier, some financial market experts were hoping for a token cut in the benchmark policy rate by the central bank, with the monetary policy statement scheduled to be unveiled on January 29 (Monday).
The auction participants offered Rs560 billion in financing to the government against its target of Rs100 billion, suggesting oversubscription by 5.5%. However, the majority of them offered financing at comparatively higher rental payment (rate of return).
In its latest report on Pakistan, the IMF has suggested further tightening of monetary policy to counter stubborn inflation, indicating that a further hike in the benchmark interest rate cannot be ruled out going forward.
While talking to The Express Tribune, Sana Tawfik, Economist at Arif Habib Limited, said the situation compelled the government to acquire only as much financing (Rs86 billion) as was available to it at the previous cut-off yields (maximum rate of return) of 19.5%. “The government took these steps (maintained cut-off yields) to give a message to the financial and capital markets that it wants the central bank to leave the benchmark policy rate unchanged (at the current record high of 22%, at least for the next six weeks),” she said.
The government raised financing at the rental payment in the range of a minimum of 15.49% to 19.49%. CEO of Topline Securities, Muhammad Sohail stated, “The government smartly borrowed slightly less amount to maintain yields in the latest Sukuk auction at the PSX.” Investors had offered an amount close to Rs560 billion to the government against its target of Rs100 billion. However, “many offers were at higher yields amid expectations of a delay in the rate cut (by the central bank).”
He elaborated that the one-year Sukuk was sold to investors at the cut-off yield of 19.49%, compared to 19.51% recorded in the previous auction held last month in December 2023. Similarly, the 3-year Sukuk fixed cut-off was 16.05%, while the 5-year was at 15.49%. The one-year Sukuk was raised at 73 basis points lower at PSX compared to the one-year T-bill sold at the rate of return of 20.23% at the State Bank of Pakistan on Wednesday, suggesting the auction at PSX provided cheaper financing than the central bank.
Read Govt plans Rs100 billion Sukuk boost at PSX
The joint financial and Shariah-compliant advisor to the issue, Ahmed Ali Siddiqui of Meezan Bank, said that the government auctioned five Sukuks, including one-year discounted Ijarah Sukuk, 3-year variable rate Ijarah Sukuk, 3-year fixed-rate Ijarah Sukuk, 5-year variable rate Ijarah Sukuk, and 5-year fixed-rate Ijarah Sukuk.
The Ministry of Finance accepted bids of Rs86 billion, with the rental rate ranging from 15.49% to 19.4995% in the case of fixed-rate Sukuks, “while in the case of variable-rate Sukuks, as per the current benchmark rate, the investors would be able to get a rental return of over 21%.” This new Sukuk has opened new avenues for investors who can now invest with as little as Rs5,000 in a wide variety of Sukuks, comprising of five denominations in three tenures.
“Development of a Shariah-compliant capital market is amongst the many steps that would pave the way for moving towards a fully Shariah-compliant economy,” he said.
The government has been selling Sukuk consistently (including at the SBP) for the past notable time, raising a total amount against the Sukuk worth Rs5 trillion at present. Shariah-compliant banks bought new Sukuk worth Rs1.7 trillion in the previous one year.
T-Bill Auction and Lower Financing:
In addition, the government raised another Rs184 billion through auctioning 3-month, 6-month, and 12-month T-bills against the target of Rs225 billion at the central bank on Wednesday.
The government borrowed lower financing at the auction, managing to reduce the cut-off yields by 50-62 basis points.
The auction results suggest the cut-off yield dropped 50 basis points to 20.49% in the auction compared to the previous auction.
The yield dropped 56 basis points to 20.40% on six-month T-billion in the auction compared to the last auction.
The cut-off yield dropped by 62 basis points to 20.22% on 12-month T-billion compared to the last auction.
The participants had offered Rs1.12 trillion against the auction target of Rs225 billion, offering five times higher financing.
Published in The Express Tribune, January 25th, 2024.
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