KARACHI – The government has further increased the debt servicing cost on Pakistan Eurobonds for foreign investors by almost half basis points to 10.44 percent in what the analysts believe as an ‘unwise’ move.
It was just last week, on January 7, when yield on Pakistan Eurobond was raised by 15 bps to 9.99 percent by Islamabad after succumbing to a government-falling political pressure against the recent oil price hike.
“Pakistan Eurobond yield has gone further up by 45bps to 10.44 percent from 9.99 percent,” sources said. According to industry sources, with the recent increase of 45bps, the government would be paying an interest rate of 10.44 percent instead of the previous 9.99 percent to the international bearers of Pakistan Eurobond to be matured in 2016.
Analysts came up with a diverse assessment of the circumstances that made Islamabad further increase the interest rate for its securities in the international market. “It’s funny to think that while interest rates in global markets are going down, the government of Pakistan is increasing it substantially,” viewed Azfar Bin Shahid. “Increasing the yield is beyond comprehension especially while you are not going for new floatation,” he added.
Terming the raise in its debt servicing cost as ‘unneeded’, the analyst expressed fear that instead of bringing any benefit the move would increase the pace of outflows from the investment-hungry country.
“This is also an expression of the extent of desperation,” Shahid said. The analyst wondered Islamabad’s worries about the investors who were selling the bonds in the market instead of coming to the country for redemption. “How many (of investors) in the European countries are crying for bonds in other countries,” he asked adding “you were not needed to increase the yield.”
Abdul Shakur of BMA Capital, however, thinks otherwise saying the move was imperative in view of the cash flows and fiscal pressures the government was presently faced with. The analyst said that an increasing trend in domestic interest rates had reflected on the country’s issuances abroad. Abdul Shakur was negative when asked if, he thought, Islamabad was going anti-clock wise by increasing the cost of debt servicing contrary to international market.
“Ours are the inflationary concerns while the global players are lowering the interest rate to increase demand,” he viewed. About monetary impact of the hike, the analyst said the government was setting a high-weighted benchmark for its fresh floatation of $500 million Eurobonds, which is due during next fiscal year.
The government’s recent withdrawal in the prices of petroleum products has increased risk perception of the international investors towards Pakistan’s default probability. Also, the January 7 increase of 15bps in Eurobond yield had reportedly triggered the credit default swap (CDS) rates of Pakistan by a massive 275bps to 830bps from 556bps on January 6.
A Eurobond is a withholding-tax-free international bond that is denominated in a currency not native to the country where it is issued. It is normally a bearer bond payable to the bearer by the bank at the rate of agreed yield. Khurram Shehzad of InvestCap Research said that a halt in the economic reform process, as witnessed by the recent oil price reversal, was the main reason which was increasing the country’s economic risks.
