Has Sukuk Euphoria Waned In Pakistan?

Kudos to Finance Minister Ishaq Dar for another feather in his cap! Pakistans re-entry into the Sukuk market after a hiatus of many, many years has been completed successfully, despite all the political dharnas, which, in Dars own words, have been hampering the economy and shooing away foreign investment.

In an exercise of self congratulation, the finance minister said in the official press release that “the profit rate of 6.75% compares favorably with the average weighted cost of comparable domestic debt of about 11 % in Pakistan, and will save the country about Rs5 billion annually in debt servicing”.

What he does not explain is whether or not, the extent to which the exchequer will be hit via the exchange rate. The consensus that is emerging is that the government`s ongoing power sector plans are expected to inflate the energy import bill to $23 billion in the next 3-4 years from about $14-16 billion at present, leading to significant pressure on the exchange rate.

Anyway, if all goes well, the country would manage to end CY14 with $15 billion of forex reserves. With the order book at $2.3 billion as against the planned transaction size of $500 million, Dar chose to collect $1 billion. Add that to the reserves ($13.21bn, as of Nov, 21) and we arrive at $14.2 billion. The rest from the $15 billion December-end target can be met by IMF inflows, and lesser oil imports on account of sliding crude oil prices.

By picking up more than the planned amount, Dar has also plugged part of the shortfall that emerged from the shelving of the OGDCL GDR. That GDR was expected to raise about $700-800 million, which the additional $500 million from the Sukuk should be able to plug in that part. However, the question as to how will Dar be able to meet the $1.45 billion revenue shortfall stemming from the non-implementation of GIDC remains unanswered (the finance ministry was not available for comments, despite many attempts).

Although the GIDC shortfall is on the local currency revenue book, perhaps another Sukuk of about $750 million to a billion in the second half of the fiscal year would be fruitful. That way Pakistan would be giving the right signals to the market – that is not a one-time buyer – but also help get better rates.

While the 5-year, $1-billion Sukuk has been raised at 50 basis point lower than the Eurobond transaction in April this year, at 6.75 percent it is still on the higher side, considering (as this column mentioned day before yesterday) that secondary market yields for a similar period Eurobond is hovering around 6.25 to 6.5 percent.

One thing that has been flagged by some critics is that the Sukuk euphoria was not as per expectations. Considering that Eurobond was oversubscribed 14 times, many in the market were expecting a similar level of excitement in the market with the order book ballooning to $4-5 billion. But that did not happen. Others argue that at the time of Eurobond the government had offered higher rates (7.25%), hence the 14 times oversubscription. Plus, much liquidity has been siphoned off from the market over the last nine months to a year.

In just the last three months, there have been five sovereign Sukuks raising about $3 billion in total. This is on top of non-sovereign Sukuks, such as that of Goldman Sachs, Islamic Development Bank, UAEs Al Hilal Bank, who also raised about $2 billion in total in the last four months. So looking from this perspective, the liquidity argument makes sense. Then again, a comparison of the order book of recent sovereign Sukuks with their respective issue sizes hints that perhaps the euphoria has indeed waned. 

Originally published on www.brecorder.com