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Islamic accounts should look past Pakistan’s politics

By GlobalCapital
09 Sep 2014

Islamic investors should not allow political turmoil to derail Pakistan’s plan to return to the sukuk market.

Politics in Pakistan has rarely been straightforward, and the latest round of protests against Prime Minister Nawaz Sharif should come as no surprise to even the most junior of junior analysts. The coup-prone country has weathered worse outbreaks of unrest in earlier years, and will do so again. The latest round should not stop Pakistan ending its nine year absence from the sukuk market.

But would Islamic investors be willing to participate in a deal from a Caa1/B-/— sovereign in the midst of political unrest? They should be. 

Islamic accounts often say that they care about how Islamic an issuer is (not just that the issue itself is Shariah-compliant). Here Pakistan’s credentials can hardly be in doubt. The country is moving full scale towards Islamic banking and insurance systems designed to benefit the real economy. As part of a four year road map for Islamic banking, the country is intending to set up three Islamic economic centres by the end of 2014. It wants Islamic banking to be 15% of its financial system by 2018. Conventional insurers are lining up for permission to offer Shariah-compliant services. 

A sovereign sukuk issue would be another important milestone in Pakistan’s commitment to the Islamic market, and will provide a platform for corporate and financial issuers to follow. While sukuk sales in Asia the Middle East has risen steadily in recent years, supply from Pakistan has dropped sharply.

Islamic investors also moan about the range of sukuk deals on offer, and about the fact that too many are from the same highly-rated investment grade Middle East borrowers. Pakistan is a sovereign so rarely seen that it might as well be a debut issuer, and one where there is every reason to expect repeat issuance following a successful inaugural deal. What better to signal to issuers like Bangladesh, rumoured to be considering a sukuk of its own, that the Islamic investor base is willing to look at new and exotic names. But in the best spirit of Islamic finance there are altruistic reasons for investors to participate.

Pakistan’s planned sukuk also comes at a time when social unrest threatens to derail government relations with the International Monetary Fund. Pakistan's IMF programme, as Moody’s pointed out last week, is crucial to the country’s external liquidity position and a key factor in its creditworthiness. Pakistan has made it through three successful reviews and a fourth would bring $545m in IMF funds this month. Whether Pakistan will be able to push through tax reform or privatize public sector companies as part of the IMF’s remaining benchmark targets is highly uncertain.

But capital markets issuance — the sovereign sold a highly successful dual tranche conventional bond in April — has been a valuable source of external liquidity. Along with funding from multilateral agencies the April Eurobond helped boost Pakistan’s foreign reserves and push its Moody’s outlook from negative to stable.

A new $1bn sukuk would give Pakistan breathing space in the event that IMF funds are delayed, further bolster its Islamic finance credentials, and give the wider market a valuable demonstration that the country has international sukuk and conventional markets at its disposal. The plans for a sukuk also coincide with a period of deep liquidity among Middle East investors, and particularly those interested solely in sukuk. Pakistan’s bond would offer a yield hard to come by elsewhere in the Islamic market, and the sovereign has recent five and 10 year bonds to act as comparables.

A fresh $1bn sukuk would help the sovereign, its corporates and the economy in what is officially the Islamic Republic of Pakistan. If a chunky yield — the sovereign’s 10 year conventional is trading at a yield of 7.7% — a rare issue in an undersupplied market and the chance to support a country making every effort to pursue an Islamic financial system does not rally support among Islamic accounts, nothing should.​

By GlobalCapital
09 Sep 2014