24 February 2004	Tuesday	03 Muharram 1425

KARACHI, Feb 23: Pakistan may swap the fixed rate liabilities on its recent eurobond into floating rates and add an option to the swap to hedge against a future rise in US interest rates, said State Bank of Pakistan Governor Ishrat Husain.

"It's an option where in case the rates remain below 6.75 per cent we will be saving money," Mr Ishrat told Dow Jones Newswires over the weekend. He said that such an option would also allow it to terminate the swap once the costs rise above 6.75 per cent.

Pakistan's $500 million eurobond due 2009 - sold last week - pays a fixed-rate coupon of 6.75 per cent. It sold at a 370-basis-point premium to US Treasury's rate.

The government believes interest rates will remain steady for some time and hopes to benefit from that by paying floating interest rates. However, it wants to ensure that when rates go up - as they are widely expected to- in the latter part of the year that it can lock back into fixed interest rates.

The Ministry of Finance has sought advice from global investment banks on the transaction, and bankers expect the government to select one or more investment banks this week for what will be Pakistan's first derivative deal outside of the rupee market.

The government is targeting a saving of around 200 basis points from the swap due to US interest rates, currently at a 45-year low. For the moment, there are no details on the swap and the attached option.

"There are effective instruments available in the international markets to address the risk of the floating rates going up to unacceptable levels in the longer tenor," said Zubyr Soomro, head of banking committee at the Overseas Chambers of Commerce & Industry.

Soomro said the swap transaction will be an important development for the Pakistani market. "Once the government goes into something like this, it provides a major impetus for other corporates to consider these options and alternatives," he said.

The derivative transaction would also provide regulators with important regulatory experience. Pakistan's derivatives market is at an early stage but has seen two major deals in the recent past - a forward rate agreement between United Bank Ltd. and Quetta Textile Mills and a Pakistan rupee interest rate swap that Citibank and National Bank of Pakistan jointly conducted with Pak-Arab Refinery Co.

Soomro said the global bond sale and the swap plan will also provide Pakistan with key access to the international capital markets which give it greater flexibility in making home-grown fund raising decisions once it stops borrowing from international financial institutions.

Pakistan announced last year that it plans to stop borrowing from the International Monetary Fund after the current $1.5 billion three-year lending programme ceases at the end of 2004. -Dow Jones Newswires