Pakistan’s new Eurobond earns lukewarm response

Finance ministry restricts borrowing to only $500m at high interest rate of 8.25%

ISLAMABAD: Pakistan’s third attempt in the last year and a half to raise debt by floating a dollar-denominated Eurobond has received a lukewarm response from international investors, restricting its option to borrow only $500 million at a very high interest rate of 8.25%.

On Friday, the finance ministry said it had issued a $500 million Eurobond with a maturity of ten years in the international market at a coupon rate of 8.25%. “Under the circumstances, the finance minister decided that it would be prudent to restrict the issue to the announced level of $500 million in order to cover the forthcoming maturity in March 2016 of a bond issued in 2006,” the ministry had said in its statement.



The country, however, appears to be in a debt trap; it is borrowing to retire borrowing. The government paid 6.12% over and above the US treasury rate for ten-year bond – a cost that highlights investors’ sentiments about the health of the country’s economy.

The 8.25% interest rate was equal to the one the country paid in March last year when it had raised $1 billion for
ten years, highlighting that international investors did not see any improvement in economic conditions of the country.

Read: Three banks in race to handle $1b bond float

Despite the distressing economic situation and low credit ratings by international credit agencies, the March 2014 bond issue somehow had gotten a better response when the investors offered almost $6 billion to Pakistan.

The 8.25% rate was in dollar terms, which is even higher than the Pakistan’s discount rate – a rate at which central bank lends money to commercial banks. The March 2014 Eurobond interest rate was less the discount rate of that time.

The finance ministry said that despite tight and weak global market conditions, and jittery investors’ sentiments, the issue was twice oversubscribed and investors offered $1 billion. Sources, however, said that most of the investors offered the money at a rate of 9% or above, which limited the government’s option to only $500 million. They said the government did not want to pay a price, which would signal that the economic situation was worse than March 2014.

“The borrowing cost should have been at least 1.5% to 2% less than the previous bond issue”, said Dr Hafeez Pasha, former finance minister. He said the global market has not yet picked up the fact that Pakistan’s economy was doing better than March 2014.

Dr Pasha said the future direction of the economy also played a role in determining the borrowing cost, as the investors knew that Pakistan built foreign currency reserves by borrowing.

The government’s failure to address the structural bottlenecks was actually the reason for offering Eurobond, as the multilateral lending agencies have withheld approval of a $1 billion cheap loan due to delay in energy sector reforms. This affected the government’s ability to meet targets set by the IMF for July-September period.

Just couple of days before the fresh issue, Finance Secretary Dr Waqar Masood told Reuters that Pakistan was hoping to raise at least $500 million by selling its debt, but hinted that it could sell more. “We are not fixated on the size. We can definitely do more and we are open with regards to the tenor too,” he said.

The high borrowing cost suggested that the international investors did not believe in the IMF reports on health of Pakistan’s economy, said Dr Ashfaque Hasan Khan, former director general debt of the finance ministry.

Published in The Express Tribune, September 28^th, 2015.