The stagnancy of private sector credit has been discussed ad nauseum in financial circles. Reinstating, credit advanced to the private sector has been hovering around Rs3 trillion since FY-08 on account of a contractionary monetary stance accompanied by fiscal slippages which have left the former with ever decreasing share of the pie. Despite this ongoing lamentation, little attention has been paid to expansion of other avenues of acquiring funds, central to this analysis being corporate bonds or Term Finance Certificates (TFC).
The benefits of the latter are unknown to a very few. The development of a corporate bond market would endlessly relieve the banking system from catering to both long-term and short term borrowers. From an investor’s perspective, funds can be locked in at fixed rates significantly reducing interest rate risk. On the economic front, higher investment is bound to generate employment and growth in addition to creating positive knowledge or technology spillovers. Judging by the fact that the current growth in real investment is less than 13 per cent of GDP, barely growing by two per cent or less in the last three years, there is an impending need for capital formation especially in fuel and power generation projects such as the Iran-Pakistan Pipeline (proposed debt: min $300m), Thar Coal gasification (estimated cost: $1.5b; FY-12 GoP allocation: $2.4m), etc.
As a logical corollary to the undeveloped bond market, little interest is shown by institutional investors in the risk free benchmark, Pakistan Investment Bonds (PIBs). In the ongoing month, to date only Rs2.3 billion worth of PIBs, of tenure between 3-10 years, have been traded versus the Rs49 billion volume in much shorter term T-Bills. On the supply side, the government also seems to have a lax attitude towards raising funds from a longer term source, as the last two auctions were held in Aug-11 and Jun-11 in comparison to the fortnightly T-Bill auctions. In addition to the lack of initiative on the market development side, this is also indicative of an ‘uncertainty’ element or rather a lack of faith in the future economic development of the country.
Moving to the corporate side, a similar observation is present in the trade volume data. In the current month, only three transactions in listed TFCs have taken place worth a total of Rs39.4 million in volume terms. Of these three, two trades of less than Rs30 million were transactions of UBL’s TFCs whereas one ascribed to Pakistan Mobile Communications Ltd. In comparison, the preceding month witnessed a trade volume of Rs445 million mainly comprising fixed income securities of Bank-Alfalah, PMCL and UBL. Although this may seem like a sizeable amount in front of the trade activity so far, it seems miniscule in front of the volume of trade in government bonds.
Two inferences can thus be derived. First, despite all the corruption and misappropriation of resources the government is attributed with, it still stands as the most trusted avenue for investment by the financial sector. Second, given that the essential investors in government securities are financial institutions, whereas those in listed corporate securities are retail investors, the funding capacity of the public seems to be limited at large versus financial institutions which exhibit no shortage of liquidity evident in bond auctions.
A third, under the table conclusion is the aversion of the public towards “interest bearing” securities, coming from an Islamist point of view which boils down to debt being considered a negative liability. Thus, although participation in the bourse is rampant among individuals, acceptability of interest gains still has a long way to go!
The writer is an economic researcher and freelance journalist. She can be contacted at [email protected]
