Tokyo, Oct. 15 (TNS): Pakistan’s first international bond in a year is likely to be well received by investors, despite deepening concerns about the country’s macroeconomic stability and deteriorating political risk profile, Japanese media quoting fund managers and economists reported on Sunday.
The finance ministry plans to raise up to $1 billion by issuing a five-year sukuk, or Islamic bond, in November to help plug a sharply widening current account deficit and shore up falling foreign exchange reserves. Sukuk refers to sharia-compliant securities structured so that buyers receive returns from assets or transactions rather than interest.
The finance ministry has issued a request for proposals to financial institutions with Oct. 14 as the deadline. Analysts said Pakistan’s decision to float a sukuk was in part due to a glut of traditional sovereign bond issues between July and September.
“The main issue facing Pakistan is that the market is currently being saturated with new supply and many of the latest bond issues have struggled a bit,” said Jan Dehn, head of research at Ashmore Group, a British investment manager focused on emerging markets. “By issuing sukuk, Pakistan may avoid some of the saturation issues.”
International investors would take into account Pakistan’s encouraging economic growth trajectory against its widening current account deficit. The deficit has increased pressure on the government to reverse its strong rupee policy and raised the prospect of it seeking balance of payments support from the International Monetary Fund.
“Pakistan will probably need to receive another financial support package, devalue its currency, or both, as the IMF will make any support contingent on a devaluation,” the Eurasia Group, an American risk consultancy, said in a recent advisory note to investors about the sukuk issue.
Pakistan’s gross domestic product grew by 5.3% in the fiscal year ended June, up from 4.8% in the previous year, driven by domestic consumption and improved agricultural and industrial output. In early October, the Asian Development Bank and the World Bank each revised upward their forecasts of Pakistan’s economic growth to 5.5% for the current fiscal year.
Pakistan’s current account deficit swelled 148.5% to $12.09 billion during the last fiscal year, driven by rising imports of petroleum products and machinery for the $62 billion China-Pakistan Economic Corridor infrastructure program, part of Beijing’s Belt and Road Initiative to improve connectivity in the region.
It reached the equivalent of 4% of GDP, up from 1.7% the previous year, according to State Bank of Pakistan, the central bank. The ADB projected the current account deficit will increase to 4.2% of GDP this fiscal year.
The ADB said Pakistan’s external debt and liabilities rose by $8.9 billion in the last fiscal year, with the government borrowing $4.8 billion to finance about 30% of the current account deficit. This included $2.3 billion received from Chinese state-owned banks, including $1 billion to pay off a 10-year Eurobond that matured in June.
