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A historic return to int’l bond market

A historic return to int’l bond market

ISLAMABAD: After pause of seven years, Pakistan has again appeared on the radar screen of global investors by launching $2 billion bonds for next five and ten year period.

Initially, the government intended to float a Euro bond worth $500 million but keeping in view highest subscription up to $6 billion, the country’s economic managers took a decision in consultation with Prime Minister Nawaz Sharif to increase the accepted amount by three times from $500 million to $2 billion.

This will help the central bank in increasing foreign currency reserves to the level of $9.5 billion by end June 2014 which are currently standing below $5 billion. The government requires more than $4.5 billion during last three months period (April-June) which will enable the State Bank of Pakistan to increase its net foreign currency reserves up to $9.5 billion.

After a period of seven years Pakistan made a historic return to the international bond market with a US dollar denominated dual tranche offering aggregate US$ 2.0 billion, raising US$ 1.0 billion each in 5 and 10 years tenors respectively.

The Finance Ministry claims that against the initial expectations of raising US $500 million, the investor response was overwhelmingly strong and the order-books were oversubscribed across the two tranches, consisting of over 400 orders from high quality investors.

The five year bonds were distributed across all major geographic regions:  59% in the US, 19% in UK, 10% in Europe, 10% in Asia and 2% in others. Fund managers took 84% of the five year issue, banks 8%, hedge funds 7% and insurance company/pension funds 1%.

The ten year bonds were distributed 61% in the US, 21% in UK, 12% in Europe, 5% in Asia and Middle East and 1% in others. Fund managers took 86% of the ten year issue, hedge funds 9%, banks 4% and insurance company/pension funds 1%.

However, the critics say that the spread of bonds was over 556 basis points and it was high benchmark agreed and placed by the government to generate the required $2 billion inflows for building up the country’s reserves position.

Keeping in view low interest rates, Pakistan has offered over 7 per cent rate on five year bond and over 8 per cent on 10 year bond. It will result into increasing debt servicing as the government will have to provide around $170 million in shape of interest payments over the next five and ten year periods.

Now the government has stabilized its external account position by jacking up its reserves position and time has come to focus upon removing bottlenecks to jump-start the sluggish exports which can really put the country on the path of prosperity on long and sustained basis. This requires overcoming energy outages, improving security situation and transferring benefits of improved macroeconomic indicators to masses as well as business sectors by reducing the cost of doing business in Pakistan which will promote investment and create job opportunities for people of Pakistan.