Pakistan hopes success in the international capital markets will help improve its image. Will it pay off? EM asks Ishrat Husain, Pakistan’s central bank governor
Pakistan has come in from the cold. After decades of being considered an economic pariah state, the country is doing its best to change public perception about its suitability for international investment.
The launch of its Islamic Sukuk bond earlier this year is a perfect example. Using the concept of ijara, based on leasing and asset backed securitization, the government issued the bond in February, despite the fact that it didn’t need to raise any money.
It opted to do so after rejecting a final tranche of $262 million in assistance from the International Monetary Fund last year. That decision raised some eyebrows domestically: critics maintain it was foolish to borrow at higher rates of interest compared to the IMF’s concessionary rate.
Ishrat Husain, governor of the State Bank of Pakistan, says they miss the point. The country is sitting on a $12.7 billion reserve, and Husain says the bond was an opportunity to approach the international markets from a position of strength, not weakness. Given Pakistan’s shaky credit history (it had to restructure the terms of its Eurobonds in 1999), it was important to establish the country as a responsible issuer of sovereign paper.
“We wanted to find out how much interest there is in our country. Our image has been pretty negative, and we wanted to test the waters by telling people what we have been able to do,” he says.
And if the results are anything to go by, sophisticated investors have been sold on the country’s credit story, he points out. Initially, investment was expected to be about $350 million; instead, it reached $1.2 billion on the order book. “It exceeded our expectations,” says Husain.
It is the second successful bond launch the country has had. Last year, Pakistan made a return to the international capital markets after more than four years, by issuing a $500 million Eurobond with a five-year maturity. The Eurobond was also oversubscribed, generating $2 billion. Fifty-four percent of assets came from Europe, 24% from Asia and the Middle East, and 11% from offshore US accounts.
Diversifying the base
This time around, the government wanted to tap into a new investor base, which Husain says will not overlap with those investing in the Eurobond, and will “disseminate Pakistan’s credit story even further, as banks have to continue to research and monitor our economy”.
Sakib Sherani, chief economist and vice-president at ABN Amro Bank in Pakistan, agrees that it was an important move towards diversification. “The thinking was to tap into the Middle East in a more robust way, not just in terms of geographic diversification, but also tapping into that large pool of capital in the Middle East that will not invest in a capital bond that is not Shariah compliant,” he explains. Almost half of the investors in the bond are based in the Middle East, with the rest in Asia and Europe.
It also helps that Pakistan’s economic fundamentals have improved a great deal in the last few years. Standard & Poor’s, the ratings agency, upgraded Pakistan’s sovereign credit to B+ last year, and Sherani says that the scarcity of Pakistani paper makes it more valuable.
On the back of its recent success, the government plans to launch a different product every year. Husain says one of the options being considered for the next launch is the creation of a 144A product for the US market. The government is also considering going for a longer maturity bond (the Shariah-compliant bond has a five-year maturity), perhaps in a variety of currencies. “Every year you want to tap into an investor base that is not familiar with Pakistan,” Husain insists.
Although the products are not available for retail consumption, there is plenty of domestic interest as well. “There is strong demand for these products, but the government’s objective is to raise a certain amount of foreign currency through debt, and domestic consumption does not help with that,” says Nasim Beg, chief executive of Karachi-based Arif Habib Investments. The firm launched its first two funds just three years ago with half a billion rupees under management. It now manages R$13 billion.
BMA Capital, another Pakistani firm, points out that there are total asset pools of between $500-700 billion of potential investment assets in the country. Given that, on a GDP basis, assets under management in Pakistan are 2% compared to 6.2% in India and 121% in the US, the potential for future domestic development cannot be underestimated either.