Economic managers mull proposal to issue yuan-denominated bonds

KARACHI: Pakistan’s economic managers are mulling to propose the government to approach panda bond market to diversify its external financing sources, especially considering loan repayment obligations ahead under $60 billion China-Pakistan Economic Corridor (CPEC) projects.

People familiar with the matter told The News that the country has an opportunity to lean towards Chinese inter-bank bond market, which is the third biggest after US and Japan, to ease pressure on dollar reserves.

“The government should think over it but no member of the EAC (Economic Advisory Council) has yet floated such an idea to the government,” a senior member of the newly-constituted EAC said, requesting anonymity.

EAC comprising independent economists was formed to advise solutions to economic difficulties.

The move would be a flight from the country’s tradition sources of funding. The previous government managed to raise $6 billion through issuing conventional and shariah-compliant debt instruments in the international markets.

The country is currently facing a tough challenge on the balance of payments front. Most of it is coming from a huge import bill for Chinese capital goods and its debt repayment obligations related to the massive energy and infrastructure projects under the CPEC.

US ratings agency Moody’s said Pakistan faced elevated external pressures due to strong domestic demand and capital-intensive imports of heavy investments for the CPEC projects. Current account deficit of the country widened to $18 billion in the last fiscal year of 2017/18 from $12.6 billion in the previous fiscal year. The central bank’s foreign exchange reserves dropped to $10.2 billion in July from $14.5 billion a year earlier, barely enough to cover two-month imports.

Loans given by China to Pakistan have a 30-year length and a five-year grace period. Annual debt repayments and profit repatriation by Chinese companies are estimated at $1 billion/year.

Sources said the proposal to make CPEC-related repayments in Chinese currency is also being discussed at the ministry of finance.

Analysts said this may be an option for the country to avoid financial assistance from the International Monetary Fund.

“Considering the US stand towards CPEC projects and America’s ability to influence IMF funding, it will be wise at present to diversify the government external financing sources which are least influenced by the US,” Saeed Ahmad, former deputy governor of the central bank said.

“Use of RMB or any other international currency in raising fund will be very useful at the right terms. Use of RMB to cover CPEC project will, in fact, save cost. These contracts should be priced in RMB if possible.”

In May, the State Bank of Pakistan and People’s Bank of China also increased their currency swap arrangement amount from yuan 10 billion to 20 billion yuan and from Rs165 billion to Rs351 billion. The currency swap arrangement has been extended for three years.

Beijing is also yearning for foreign issuers of bonds to promote greater use of yuan and diversify funding sources of its One-Belt-One-Road initiative connecting China to Europe

Early this year, Sharjah, one of the seven members of the United Arab Emirates, raised 2 billion renminbi ($316 million) through a three-year issuance in the Chinese debt capital market.

Turkey has recently unveiled plan to issue yuan-denominated bonds to shed the country’s reliance on western markets for external financing. Russia is also thinking on the same line, but the intention could stumble on strict regulatory policies in China that dissuade outflow of funds and turn the instrument unattractive for the issuers.

Bankers see greater demand for shariah-complaint bonds instead. “Firstly and under the current risk appetite for Pakistan, Islamic bonds could be more attractive as they are backed by an underlying asset,” said SBP ex-governor Yaseen Anwar, who signed the currency swap agreement with China.

“Thus such instruments should be used, especially as I believe there is liquidity for shariah-compliant instruments. Investor interest with the diaspora may be available as well.”

Anwar said yuan bonds are more complicated and one has to measure the cost versus other instruments as well as the willingness of the Chinese contractors to accept renminbi (RMB) for loans already denominated in US dollar.

“Hedging can be costly,” he added. “New projects could be appealing in RMB and in that instance the currency swap agreement could play a role.”

Ahmad agreed that sukuk issuance for CPEC projects could be useful and they might be used as security under Islamic finance structure. An investment banker at BankIslami said issuing RMB sukuk with the help of Chinese or Hong Kong-based banks is a feasible idea.

“Some challenges are associated with this: higher cost/pricing of the sukuk due to Pakistan’s low credit rating, and almost nonexistent inflows of RMB to Pakistan,” he said, requesting anonymity.

“Foreign inflows to Pakistan were mainly in US dollars or Euro which made transactions vulnerable to long-term foreign exchange risk on RMB sukuk.” the banker said.

A report by the International Islamic Financial Market said the US dollar continues to be the favoured currency to attract foreign investors from around the globe. “2018 may see some issuance of non-local currency sukuk.”