Pakistan borrows $ 2.5 billion through Eurobonds

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ISLAMABAD:

Pakistan Tuesday borrowed $ 2.5 billion from Eurobonds by offering very lucrative interest rates to lenders aiming to build up foreign exchange reserves which remain fragile due to the increase in external debt payments in the absence of non-debt creating inflows.

The government has agreed to pay interest rates of around 6% for five-year bonds and 8.875% for 30-year bonds, according to details released by financial advisers. For 10-year bonds, the country will pay 7.375% interest, they added.

Newly appointed Finance Minister Hammad Azhar will make an official announcement on the Eurobond deal today (Wednesday). In the past week, the government borrowed $ 4.4 billion International Monetary Fund (IMF), the World Bank and global financial markets.

This is Pakistan’s first capital market transaction in nearly three and a half years. Interest rates were relatively higher than initial expectations, indicating that investors charged a higher risk premium.

Compared to expensive short-term commercial borrowings, long-term bonds are considered the preferred choice of instruments due to their longer maturity and lack of conditions.

The World Bank said on Tuesday that risks to Pakistan’s public debt exposure remain “high” and that the country’s total public debt will reach 94% of gross domestic product (GDP) by the end of the year. current exercise.

The government agreed to pay interest rates that were 5.2% to 6.5% higher than prevailing US Treasury rates despite an overall low interest rate environment.

The government received $ 5.3 billion in offers, almost 165% more than the requirement indicated to investors.

The country raised $ 1 billion through five-year bonds at an interest rate of 6%, 5.23% above the US benchmark rate.

Another billion dollars was raised for 10 years at 7.35%, 5.6% above the 10-year US Treasury rate. The 10-year borrowing cost was also higher than that paid by the Pakistan Muslim League-Nawaz (PML-N) government in November 2017 on a similar instrument.

Likewise, $ 500 million was borrowed over 30 years at an interest rate of 8.875%, 6.5% higher than the corresponding US rates.

The government has paid a price that is also higher than the current yield on Pakistani bonds maturing in 2027 and trading on the secondary market at around 5.9%.

Pakistan entered the global financial markets after more than three years. This is the first global business transaction carried out by the Pakistani government Tehreek-e-Insaf (PTI).

In November 2017, Pakistan raised $ 2.5 billion in global capital markets via a five-year Sukuk and 10-year Eurobonds. By that time, the government had raised $ 1 billion through Sukuk at 5.625% and the remainder of the $ 1.5 billion was generated by 10-year bonds at 6.875%, or 455 basis points above the corresponding 10-year US Treasury benchmark rate.

The government relies heavily on external borrowing to meet its financing needs and to keep gross official foreign reserves at a minimum. This was due to almost stagnant exports and a decline in foreign direct investment.

The World Bank said on Tuesday that Pakistani exports would fall again this year but could pick up in the next fiscal year. In its South Asia report, the Washington-based direct lenders predicted stable foreign direct investment for this fiscal year as well as for the next fiscal year. The only positive aspect has been foreign remittances which have shown healthy growth so far.

Pakistan’s foreign exchange reserves are currently sufficient to cover three months of imports. Reserves remain low despite the State Bank of Pakistan offering unusually high interest rates to foreign Pakistanis investing in government securities.

Pakistan’s credit rating is B negative by Standard and Poor with a stable outlook and B3 by Moody’s.

The Pakistani rupee is currently appreciating against the US dollar after the IMF relaunched the $ 6 billion bailout last Tuesday.

The government had retained the services of Credit Suisse, Deutsche Bank, Emirates NBD, JPMorgan, Standard Chartered and the Bank of China to organize the operation.

Posted in The Express Tribune, March 31st, 2021.

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