Pak sovereign bond issue – update

The investment community ranks Pakistan as Indonesia’s twin in Asia; but one whose economic future depends much more on good relations with the US. The US$500M sovereign bond issue was to be floated in Jan 04, in the expectation of over 300 basis points over the US treasury bonds. Here’s an update.

Rarity value versus unfamiliarity. Local investment versus an international benchmark. Improving economic fundamentals versus longer-term security concerns.
These are some of the trade-offs the government of Pakistan will have to weigh as it huddles with lead managers over the coming weeks to discuss its plan to return to the international bond market for the first time in four years.

Saudi protectionism rises

Indian workers in Saudi Arabia, the largest expatriate group in the kingdom, are under focus again following reports that the seven million foreigners in the country have drained the country of a staggering SR285.3 billion ($76 billion) during its last five-year development plan…Indians alone, who represent the largest foreign community in Saudi Arabia, have been remitting SR15 billion annually to India.
Total remittances from Indians from the six-nation Gulf Cooperation Council (GCC) exceeded SR37 billion annually giving a substantial boost to the Indian economy, he added. UNI report

The Saudi government is concerned about the high unemployment among local Saudis, of up to 10% of the population. While the government probably cites the higher wages as a primary cause for this, I think the problem lies deeper. The education system with its focus on religious studies does not create the right mix of graduates required for a modern economy. It is therefore likely that Saudis will not be able to replace the foreign professionals who form the backbone of the economy.

Construction and domestic workers could be affected, but its unlikely that the ‘entitlement economy’ of Saudi Arabia will produce workers who are willing to take on these ‘undesirable’ jobs.

Expelling expatriate workers is not a solution. Rather the Saudi government should explore how it can leverage on the strengths of the large expatriate talent pool to create wealth; possibly by encouraging entrepreneural growth. This means the government has to liberalise its entitlement economy and expose it to the vigours of a market economy. More importantly it should reform the education system and bring it in line with the modern world. These may not be politically palatable in a country where there is no representative government. Physician, heal thyself first.

Optimism about the Indian economy

Is India’s economy going to grow 7% this year ? Likely, says the Indian Express. Information Technology, Outsourcing and Pharmaceutical companies are emerging global challengers. Manufacturing, especially automotives show promise – at least in the domestic market. While the regulation in telecommunications remains an albatross, Indian telcos are still investing in network infrastructure, which is sure to provide them with a competitive advantage in the time to come. Agriculture seems to have done well due to a favourable monsoon. The rupee has appreciated against the US dollar (thanks to the falling dollar).

The real challenge is for India to be able to repeat and improve this kind of performance over several years – even decades. For this to happen, India needs to radically improve its infrastructure. I’d like to see the following priorities on the manifestos for the coming election:

  • Universal uninterrupted electricity
  • Universal access to hygeinic water supply
  • Universal access to telephone and internet
  • Universal access to motorable roads
  • World class highways connecting major towns and cities
  • Improved primary and secondary education

It is possible to achieve these substantially in five years; more importantly the government must allow private and foreign investment in each of these sectors.

I saw this article in the Economic Times, comparing growth rates for industrial production. So Pakistan tops the table this year, thanks to its IMF designed reforms. But that’s to be expected – its economy was in a shambles for so many years, that the growth figures are likely to look good, percentage-wise. India must compare itself with China and try to understand why there is a gap there. The way to close the gap is what the above list is all about.

Pak Economy Watch: $500m Eurobond issue

  • Pakistan said it has appointed J.P. Morgan Chase & Co. and Deutsche Bank AG as lead managers for a $500 million Eurobond offering.

    ABN Amro Holding NV also has been given a co-lead manager role for the Eurobond issue. A person familiar with the matter said the government plans to issue the bond early next year.

    The government said the mandate marks the return of Pakistan to the international capital market after its last international bond in 1999,which combined three previous bonds into a single $623 million issue due 2005. Asian Wall Street Journal.

  • The proposed bond issue, which will contribute to repaying Pakistan’s debt, would mark the country’s first foray into the international bond market since sanctions were imposed following its nuclear tests conducted in 1998. Pakistan last sold a $300m global bond in 1997. Financial Times.
  • The government says the pricing of the Eurobond would depend on the market response at the time of placement. However, generally, it is expected that the new issue would attract around 300 basis points above the US Treasury for a similar five-year tenor.

    The Ministry of Finance would not divulge the details of contract with the lead managers. “These details would be made public when the transaction is completed over the next few months,” a senior official said. However, a news report indicated that out of the pocket expenditures could be around $16.6 million. The government says that it has followed a very transparent and competitive process in awarding the mandate. The News/Jang.

  • “But our reserves have been built essentially for meeting any unforeseen crisis or a catastrophe and not for consumption purposes,” he said. Mr Shaukat said since Pakistan had been offered a better credit rating by Moody’s Investor Services from B3 to B2 and now Standard and Poor’s was also likely to give a similar rating, it was prudent to seek funds through bonds flotation.

    Pakistan’s credit rating has recently been upgraded by Moody’s Investor Services in recognition of its improvements in overall economic situation in general and external balance of payments in particular. This transaction, the announcement said, was specifically meant to establish bench marking in the international capital market as Pakistan’s foreign exchange reserves stands at $11.5 billion – sufficient to finance 11 to 12 months of imports.

    Similarly, budget deficit is targeted to decline to four per cent of GDP this year, inflation is currently hovering around three per cent, exchange rate is stable, current account balance is in surplus, the burden of both external and public debt has declined substantially; exports, imports and tax collection are growing at double digit level, and growth which was 5.1 per cent last year is targeted at 5.3 per cent this year.

  • Let’s wait to see what happens by then. This bond issue may be the first test of the regime’s boast of the Pakistan economy’s ‘new strength’. One just hopes this $500m is not used to support the ‘arms race’ which Islamabad sees in South Asia.

    Update: S&P rates it a BB-

    The Great Job Machine

    This one is about the global economy. An op-ed piece that appeared in The New York Times points out that the recycling of jobs is just part of the economic growth cycle.

    “A century ago, 40 of every 100 Americans worked on farms to feed a nation of 90 million. Today, after one of history’s most brutal downsizings, it takes just two agricultural workers out of 100 workers to supply an abundance of food to a nation more than three times as large. Suppose we’d kept 40 percent of our labor on the farm. Absurd, yes, but if we had, we wouldn’t have had enough workers to produce the new homes, computers, movies, medicines and the myriad other goods and services of our modern economy.

    Likewise, the telecommunications industry employed 421,000 switchboard operators in 1970, when Americans made 9.8 billion long-distance calls. Thanks to advances in switching technology, telecommunications companies have reduced the number of operators to 78,000, but consumers ring up 98 billion calls. Let’s face it: Americans are better off with more efficient long-distance service. To handle today’s volume of calls with 1970’s technology, telephone companies would need 4.2 million operators, or 3 percent of the labor force. Without the productivity gains, a long-distance call would probably cost 40 times what it now does.”

    This article puts the entire movement of service-jobs to countries such as India, igniting the BPO boom. I saw an article in the McKinsey quarterly which explained how a dollar spent on outsourcing to India creates value for the United States as well.

    What this means for countries such as the United States is that innovation will be the only guarator of economic competitiveness.

    Elephant and Dragon

    Recently a thesis has emerged that India is poised to outpace China in the longer run due to the entrepreural nature of its growth model. China’s growth has been due to a huge amount of foreign direct investment in the last twenty years. It attracted more FDI in just one year (2002) than what India attracted in the past ten years! Foreign Policy:

    This thesis goes on to suggest that an entrepreural economy will do better in the long run. While this in itself could be disputable (besides, ‘in the long run, we’re all dead’) I’m beginning to worry that this will take us back to the days of the home-grown self-sufficiency dogma. It is necessary for our entrepreneurs to see world-class competition in their own backyard. Indian industry has what it takes, but can churn out global winners only if it learns to compete even in its domestic market.

    There was good news in the Asian Wall Street Journal today – the Indian economy could even grow at 8% this year. But the mindset against privatisation needs to change pretty fast if such a momentum can be sustained.