ISLAMABAD, Jan 26: The government has formally established an "asset based" Pakistan International Sukuk Company to deal with new $600 million shariah compliance Sukuk bond during the next five year period, says a senior government official.
"The government has decided to continue maintaining its relationship with investors for which we plan to be in the market once in a year with a view to apprising the global investors about the improving economic fundamentals", said Economic Advisor to the ministry of finance Dr. Ashfaque Hasan Khan.
He told Dawn here on Wednesday that the launching of Sukuk bond will also greatly help the government to attract the Foreign Direct Investment (FDI). The floating of bond, he said, was considered as one of the best mechanisms or instruments to attract FDI as the countries like China, Malaysia, Thailand, Korea and Austria and many other European countries continued to float bonds and thus maintaining relations with investors.
"Pakistan is also witnessing a rise in inflow of FDI," he said adding that during the first half of 2004-05, the country received FDI worth $445 million as against $270 million during the same period last year.
Responding to a question, the economic adviser said that those who believed that the government has mortgaged Rawalpindi-Lahore motorway (M-2) to float new $600 million Islamic bond were mistaken as Sukuk was asset-based and not asset backed.
The purpose of floating Sukuk bond was to diversify its investors base. In Feb 2004 government had floated $500 million Eurobond and in that transaction Middle East had gotten only 12 per cent. But a lot of unsatisfied demand could not be met by the Middle Eastern investors.
The purpose was to target these unsatisfied demands so as to maintain relationship with global investors, and through the flotation of Sukuk the government was able to explain to the global investors the strengthening economic story of Pakistan, which was well received by investors in Asia, Europe as well as Middle East.
Another objective of Sukuk bond, he said, was to popularise Islamic banking in Pakistan. The government has already taken a decision about the phased wise or gradual implementation of Islamic banking along with conventional banking. In this connection the State Bank has issued licences to Meezan Bank to operate strictly on Islamic principles.
Al-Barqa bank is also operating on Islamic principles. The central bank has allowed conventional banks to set up their subsidiaries which could work purely on Islamic principles.
The State Bank, he pointed out, has also allowed the existing commercial banks to designate branches which could operate on Islamic principles. "And now we are expecting Dubai Islami Bank to also enter Pakistan".
All these progress has been made and now the launching of Sukuk was a step forward in that direction and this will help develop domestic capital market on Islamic principles. He said response of the Sukuk was widespread. Pakistan did not only concentrate on Middle East but also went to investors in Asia and Europe.
This diversification of investor base was reflected in the distribution as Middle East investors got 47 per cent shares, Asian investors 31 per cent and 22 per cent went by Europe. "This transaction was widely recognized as a best sovereign Sukuk deal so far."
This deal, Dr Khan said, was concluded at the toughest end of the price guidelines. The government gave initial price guideline in the range of 6 month Libor plus spread of 220-235 basis points.
As the book continued to build up, the government revised its price guideline to 220-225 basis point over 6 months Libor. But when the size of the book swelled to over $2.2 billion, the government finally priced it at the tight end of 220 basis point over 6 months Libor, he said.
This was totally in line with the current Eurobond trading in the secondary market which was being traded in the range of 215-220 basis point over 6 month Libor with remaining four years duration of the bond. Therefore, the yelled curve remained flat.
Asked about the current credit rating of Pakistan, he said that although M/S Moodys' International has upgraded Pakistan by changing its stable outlook to positive, market participants and international investors believed that Pakis-tan was an under rated country by the Standard and Poor (S&P) and Moodys' International.
He said by looking at Pakistan economic fundamentals the international investors as well as various international magazines like Finance Asia believed that Pakistan should be upgraded at least by two notch above the current level. "In fact market has already upgraded Pakistan by two notch which is reflected in the tight pricing of the Sukuk," he added.
