Bloomberg News

Best Asia Currency Bolsters Pakistan Sukuk Plan

May 07, 2014

Improving investor confidence in Pakistan, whose currency is the best performing in Asia this year, bodes well for its plan to tap the global sukuk market for the first time since 2005.

The world’s second-biggest Muslim nation may sell “much more” than $1 billion of Shariah-compliant notes in the third or fourth quarter, Finance Minister Ishaq Dar said in a May 5 interview in Astana, Kazakhstan. The rupee has climbed 7.2 percent in 2014 as the government increased the size of a non-Islamic dollar bond to $2 billion last month from $500 million, after demand exceeded supply by 14 times.

The International Monetary Fund is set to conclude a review on the Pakistan economy on May 10 before releasing the next part of $6.6 billion in aid, just as foreign-exchange reserves climbed to $11.7 billion in May. Moody’s Investors Service said this week that the nation’s political stability and the improving external position may trigger a credit-rating upgrade.

“Pakistan wants to capitalize on this euphoria,” Mohammed Sohail, chief executive officer at Topline Securities Ltd. in Karachi, said in a May 6 telephone interview, adding that it may result in the nation even raising money at a relatively cheaper rate. “In terms of sukuk, there’s a lack of product that Pakistan has offered.”

Economic Steps

The South Asian nation sold $1 billion of five-year bonds that don’t comply with Islam’s ban on interest at a coupon rate of 7.25 percent in April, and another $1 billion of notes due in a decade at 8.25 percent. The securities yielded 7.18 percent and 8.34 percent, respectively yesterday, data compiled by Bloomberg show. It last issued global Shariah-compliant debt in 2005, when investors bid for twice the $600 million on offer.

Average yields on global sukuk issued in dollars and Saudi riyals dropped 42 basis points this year to 3 percent and fell to a 10-month low of 2.87 percent on April 29, according to a Deutsche Bank AG index that includes a combination of government and corporate notes. They’ve averaged 3.45 percent since the gauge’s inception at the start of 2011.

Pakistan, which has been reliant on IMF support for development and investment, is targeting to achieve reserves of $15 billion by September, up from a five-year low of $8.12 billion in November. The Washington-based fund had laid down stipulations for meeting economic reforms in return for aid.

Economic growth accelerated to 4.1 percent in the six months through December, from 3.4 percent in the previous period, Finance Minister Ishaq Dar in an April 16 interview. The budget deficit narrowed to 3.1 percent in the eight months through February, compared with 4.1 percent a year earlier.

‘Global Appetite’

The rupee traded at 98.38 per dollar in Karachi yesterday and has rebounded 10.5 percent from an unprecedented low of 108.70 on Dec. 3, data compiled by Bloomberg show.

“The rupee reflects the global appetite for investing in Pakistan,” Sayem Ali, an economist at the local unit of Standard Chartered Plc, said in a phone interview from Karachi yesterday. “The government is on track to meet all the required targets to secure the IMF’s confidence, which will bring in more new inflows and more direct investment.”

Pakistan’s central bank has refrained from selling local-currency sukuk since March last year, depriving local lenders of investment options in a nation where Shariah-compliant banking assets climbed to a record.

Holdings exceeded 1 trillion rupees ($10.2 billion) in December for the first time and accounted for 9.6 percent of the total, according to the latest central bank data. State Bank of Pakistan is aiming for 20 percent by 2020.

Relapse Risk

Worldwide sales of Islamic bonds, which pay returns on assets to comply with religious tenets, have increased 12 percent in 2014 from a year earlier to $17.2 billion, according to data compiled by Bloomberg. They reached $43.1 billion last year and an all-time high of $46.5 billion in 2012.

South Asia’s second-biggest economy is rated B- by Standard & Poor’s, six levels below investment grade, while Moody’s rates the nation at Caa1, one level lower than S&P.

Completing the reform program set out by the IMF could be a key trigger for a rating upgrade, Moody’s analysts led by Anushka Shah and Bart Oosterveld said in a May 6 statement.

“A relapse in which official foreign-exchange reserves decline again would be credit negative as it would materially increase the probability of default,” they wrote.

Pakistan’s planned global sukuk will be oversubscribed, according to Imran Altaf, a Karachi-based fund manager at Faysal Asset Management Ltd., which oversees about 8.2 billion rupees.

“The bond is certainly expected to get a better and more enthusiastic response than the conventional offering, owing to excess liquidity and the improvement in Pakistan’s macroeconomic variables,” he said in a May 6 e-mail interview. “Investors are likely to snap up anything offering a yield north of 4 percent.”

To contact the reporters on this story: Yudith Ho in Jakarta at yho35@bloomberg.net; Liau Y-Sing in Kuala Lumpur at yliau@bloomberg.net

To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net Simon Harvey


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