Yield on Pakistan’s Eurobonds gains substantially

Yield fell below 8 per cent for the first time in two years

KARACHI: Yield on Pakistan’s Eurobonds, amounting to 500 million dollars, gained substantially in the offshore markets and in almost two years fell below 8.0 per cent — a sign that risk factor related to the country’s economy is diluting, said a Singapore-based foreign bonds dealer.

The gradual improvement in risk perception of Pakistan has resulted in Pak Eurobond, maturing in 2016 to drop below 8 per cent, for the first time since May 2008 to 7.96 per cent, said the dealer, who asked not to be named. The credit default swap ratio spread has slashed by 84 basis points in a day to 6.87 per cent, he said

"The drop in yields on Eurobonds shows that the economic imbalances are on the recovery path," he said.

Pakistan's current account deficit has improved by $5 billion to $2 billion in first eight months, the rupee has stabilised against the dollar, foreign exchange reserves have increased and the economic outlook remains stable."

These measures validate the entry of Pakistan in the overseas bond market and could help ease pressure on the local foreign exchange market and provide the much-needed budgetary support," he added.

The government has plans to sell $500 million worth five-year convertible bonds of state-run Oil and Gas Development Company. The planned bonds are expected to get an offer of 7.50 per cent to 7.75 per cent, which appear to be a good bargain under the current global economic situation, analysts say.

Yields on all Pakistani bonds increased in 2008/09, especially in the first six months of the period. The spreads (yield difference between Pakistan and USA bonds) rose sharply. In case of spread, Pakistan's 10-years Eurobond and the US bond of the same tenors reached 22.83 percentage points at end-December 2008 from 8.81 percentage points at end -June 2008.

Widening spread, according to an official of the ministry of finance, reflects the state of both US and Pakistani economies.

Pakistan in 2006 floated 10-year maturity Eurobonds amounting to $500 million and for 30 years, 300 million dollars with an annual return of around 7.125 per cent and 7.875 per cent respectively.

Moreover, in 2007, the government again floated a bond for 10 years amounting to $750 million with a return of 6.875 per cent.

It received an overwhelming response from foreign investors and the yield it fetched was sign that the countryís economy showed a significant growth. Two years ago, economic growth average hovered around 5 per cent, with foreign investment reaching an all-time high of $8.4 billion during fiscal year 2006-07.