Pakistan has successfully returned to the international bond market after being absent since 2007, selling US$2bn of debt with almost two-thirds going to US-based money managers.
The transaction comes as the largest international bond offering in Pakistan’s history, although the initial plan to raise up to US$500bn yielded a much stronger response from investors, according to global market and economic information group IHS.
Hanna Luchnikava, senior economist at HIS, noted that the sale was completed despite Pakistan’s vulnerable balance-of-payments position and an ongoing stabilisation programme with the International Monetary Fund (IMF).
Pakistan’s return to commercial borrowing while still under the IMF programme is unusual, according to Luchnikava, with concessional financing often being the only available option. Commercial borrowing has been long out of reach for Pakistan not only due to rising solvency and liquidity pressures, but also broader geopolitical and institutional risks.
However, the country did make some progress in reducing its fiscal and current-account deficits, resolving public sector debt problems and restoring confidence in its currency since the new government of Nawaz Sharif came to power in May 2013.
After falling to slightly more than US$4bn in November 2013, Pakistan’s foreign-exchange reserves have slowly started rising since February and are likely to return close to US$10bn by the end of 2014, while the Pakistani rupee (PKR) has appreciated by 9.4% since last November.
Although the outlook for further stabilisation broadly remains positive, significant risks of reform slippages remain. If Pakistan fails to resolve its chronic structural imbalances, particularly with respect to fiscal management and ability to attract non-debt creating inflows, the costly servicing of debt on recently issued bonds may pose significant long-term risks to Pakistan’s creditworthiness.
Pakistan’s return to the global bond market after a seven-year hiatus comes two days after Sri Lanka sold a bond for the second time this year. Reports suggest that bankers expect Papua New Guinea, Bangladesh and Bhutan to also come to the market this year, hoping to lock in low yields.
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