KARACHI, Nov 23: An upgrade of Pakistan's ratings by Standard & Poor's is likely to improve the price for the country's first foreign currency Islamic bond, a senior Finance Ministry official said on Tuesday.
Stocks in Karachi also rose after the agency late Monday lifted its long-term foreign currency ratings by one notch to B+ and local currency ratings to BB, citing falling debt and sustained economic progress.
"This will make investors confident about our strong economic fundamentals and help us achieve tighter pricing when we go on road shows for the Islamic bond," Ashfaque Hasan Khan, head of the Finance Ministry's debt office, told Dow Jones Newswires.
Pakistan's government plans to sell $500 million in five-year Islamic bonds toward the end of the year or in January to tap the fast-emerging international Islamic debt market.
While the long-term foreign currency rating of B+ is four notches below investment grade, it is a vast improvement over the 'selective default' imposed by Poor's after Pakistan's nuclear tests in 1998, which triggered international sanctions.
Sakib Sherani, chief economist at ABN Amro bank, said traditionally a one-notch improvement means a 25-basis-point decrease in the country's risk premium. However, emerging market bonds have been volatile lately due to fluctuations in the liquidity situation and the conflicting outlook over US interest rates, he said.
Pakistan's $500-million Eurobond last traded in London and Luxembourg at 251 basis points above the five-year US treasury bond, said Sherani. This is a sharp rally since February when Pakistan sold the primary issue at 370 basis points above five-year US treasuries.
He said S&P's move is a bit surprising given the possibility of political disturbance. Analysts said another obstacle for the economy is the risk of higher inflation, which is expected to beat the government's target of 5 per cent in the current fiscal year. In the four months of the current fiscal year, prices grew 9.06 per cent, led by food and house rent.
Despite these threats, the Poor's said Pakistan's fiscal management remained prudent, raising investors' confidence. Mr Ashfaque said growth prospects were strong because of a bumper cotton crop and higher manufacturing growth led by exports of textiles. The economy is projected to grow 6.6 per cent in the current fiscal year, up from 6.4 per cent in the previous year.
