Pakistan advised to delay bond sale

Deteriorating macroeconomic indicators cited as the major hurdle.

ISLAMABAD: Pakistan’s bid to return to international capital markets to raise $500 million for budget financing has been dealt yet another blow as the financial adviser appointed for the transaction has advised the government to put the deal on hold.

A consortium of financial advisers, led by Citibank, has suggested the government against going to international capital markets to float $500 million to $650 million convertible bonds backed by Oil and Gas Development Company (OGDC) shares, said sources in the Privatisation Commission.

The government had sought advice after Moody’s decision to downgrade Pakistan’s sovereign ratings to Caa1- the lowest-ever rating by the international credit rating agency, suggesting investment in Pakistani papers as highly risky. The consortium comprises Citibank, JP Morgan, Credit Suisse and BMA Capital. The advisers have cited volatility in the equity markets and deterioration in macroeconomic indicators the key hurdles in materialising the deal, said the sources.

An official of the petroleum ministry also said that the government has decided to put the deal on hold due to multiple factors. The Ministry of Finance did not comment despite repeated attempts.

It is the third year that the government is trying to venture into international capital markets. However, the Greek debt crisis and deterioration in the macroeconomic indicators have spoiled all such bids. In June 2011, two Pakistani teams held non deal road shows in Singapore and London to gauge the investors’ response to issuance of a 10% stake in OGDCL.

The parliamentary panels and independent economists have opposed the transaction on the ground that the government is selling long-term assets to pay off short-term liabilities.

In 2007, Pakistan had successfully floated a 10-year Euro bond. At that time it floated the bonds at 6.68%. The yield on 10-year bonds remained over 13% in July- the second most expensive after Greece.

Pakistan should not go to the international capital markets at this point in time as the investors will not consider investing below 13% to 14% returns, which will make the borrowing very expensive, said Dr Ashfaque Hasan Khan, Dean Business School of National University of Sciences and Technology. While serving in the finance ministry, Khan was part of team that negotiated the 2007 Euro bond.

He said that floating bonds at such high interest rates will become a benchmark for the country and shut the doors for future governments to raise finance in international markets. Khan suggested that the government keep holding the transaction until the country’s macroeconomic indicators improve.

The last fiscal year closed at an 8.5% budget deficit, a current account deficit of $4.6 billion while the foreign investment plunged 63%, the indicators suggesting deterioration at all fronts.

An International Monetary Fund (IMF) team just concluded its week-long visit to Pakistan. The team held discussions with the finance ministry and the State Bank of Pakistan. The sources said that the IMF expressed its serious concerns over deterioration in all economic indicators. They suggested the finance ministry to present realistic figures that will ensure predictability contrary to missing all the targets by wide margins, said the sources.

The Ministry of Finance is facing credibility dilemma after the budget deficit and current account deficits widened by twice the estimates given by the economic managers.  The finance ministry officials refused to comment on the outcome of the IMF team visit.

Published in The Express Tribune, August 4^th, 2012.