Given the clear bid on frontier sovereign credits (Zambia and Sri Lanka both rallying this week), Pakistan has timed its return well – something it might not have been able to do as easily had it needed to structure a sukuk. It’s excusable that the government declined extra complications since it lacks strong pricing comparisons and has experienced economic and political instability in recent years.
Pricing advantage also looks to be with conventional bonds for Pakistan. GCC-based sukuk may price cheaper than bonds due to the region’s domestic investor base, but this does not necessarily extend to other emerging market countries. In particular, conventional bonds benefit from their inclusion in emerging market indices while sukuk do not, so sukuk from these jurisdictions tend to trade wider rather than inside the conventional curve.
But since it is also a time when Pakistan is making a bigger push towards Islamic banking – with conventional banks lining up to convert with State Bank of Pakistan’s encouragement through a four year roadmap – it is strange that the possibility of issuing sukuk did not surface on the roadshow. According to one lead banker, there was general comment on funding options but “nothing specific”.
Pakistan is not a novice to sukuk, although its last and only international outing predates the previous conventional bond. Issued in 2005 and redeemed in 2010, the deal did well and was increased in size from $500m to $600m. It was also priced at just 220bp over Libor.
But times have changed and so have Pakistan’s fortunes. As various non-GCC (and non-Muslim) territories jockey to promote their Islamic finance credentials, a successful return to sukuk by Pakistan could put it right at the centre of a growing global network.
Investors said that expectations of repayment on the latest bonds are based heavily on IMF support. But they could also weigh against this the highly likely support of the AAA-rated Islamic Development Bank for a sukuk issuing member – particularly given that the development bank has lent several billion dollars to the Islamic Republic of Pakistan over recent years and has agreed $220m already this year.
The size of Pakistan’s book and final pricing for the conventional bonds remains to be seen. But it makes sense to consider all forms of funding, and Pakistan should take the opportunity to discuss a return to the Islamic finance map.