Pakistan is planning its return to the international capital markets with a debut Panda bond on the cards by the end of this year and a G3 currency bond by July 2026, finance minister Muhammad Aurangzeb said in an interview with IFR Asia.
The government has begun discussions with the Asian Infrastructure Investment Bank and the Asian Development Bank to obtain credit guarantees, which lower-rated sovereigns need to attract investors in the renminbi market.
“We want to a certain extent follow what Egypt did – not necessarily in terms of size, because we are relatively comfortable with respect to our external finance position at this point in time,” he said.
In October 2023, Egypt (then rated Caa1/B/B) priced a Rmb3.5bn (then US$480m) debut Panda bond with guarantees from the AIIB and the African Development Bank.
Pakistan, rated Caa2/CCC+/CCC+, is looking to raise US$200m-equivalent as a base case, with the option to tap the bonds later.
“The important thing is that we diversify our funding base,” Aurangzeb said.
The sovereign has appointed China International Capital Corporation as a lead on the transaction, alongside domestic institution Habib Bank.
Pakistan will also be required to obtain a domestic Chinese rating, the minister confirmed.
“I'm hopeful during this calendar year we can move in that direction," said Aurangzeb. "I do think it will for Pakistan be an important milestone.”
The sovereign has in the past tapped the US dollar market in conventional and sukuk formats, most recently in January 2022 when it priced an upsized US$1bn 7.95% seven-year sukuk deal. It was then rated B3/B–/B–.
“Not tapping the second-largest and second-deepest capital market in the world has been a miss on our part,” Aurangzeb said with reference to China.
Pakistani issuers have also been notably absent from international bond markets, the last offshore issue out of Pakistan being the Water and Power Development Authority’s US$500m 10-year deal in May 2021.
“I do think that once the sovereign goes back into the capital markets some of the corporates will follow … I certainly hope that on the Panda side we see some of that activity, and some of the larger utilities can actually do that,” he said.
Sustainable growth
Meanwhile, the sovereign’s return to other currencies is contingent on attaining a Single B rating from the international rating agencies, which Aurangzeb said he hoped would happen by the end of the current fiscal year in June.
Fitch and Moody’s last year upgraded Pakistan to CCC+ and Caa2 respectively as its macroeconomic conditions, liquidity and external position improved. However, Moody's said low foreign exchange reserves, weak governance and political uncertainty remained concerns. S&P has kept Pakistan at CCC+.
Rapid inflation, weak reserves and currency depreciation brought the country close to default after the pandemic, prompting downgrades in late 2022 and early 2023.
“The rating agencies are looking for sustainable growth before they trigger the further upgrade,” Aurangzeb said.
Achieving sustainable growth and durable macroeconomic stability has been Aurangzeb's focus since assuming the role in March last year. He stressed the importance of staying on course with reforms.
“What we have seen in the recent past is the moment we touch 4% growth we put the foot on the pedal and pump liquidity, imports go haywire, we run out of foreign exchange, get into balance of payments problems and then we go back to the [International Monetary] Fund, so what we clearly want to avoid is that kind of cycle.”
A US$7bn 37-month extended fund facility was approved by the IMF’s executive board in September, after Pakistan completed an earlier US$3bn nine-month standby arrangement negotiated in July 2023.
Prime minister Shehbaz Sharif has said he hopes the country’s latest IMF programme, its 24th, will be its last.
Tied to the loan, Pakistan has pursued a number of fiscal and monetary reforms including raising taxes, improving its balance of payments position and building foreign exchange reserves.
It plans to increase its internal tax-to-GDP ratio to 13.5% by the end of the IMF programme, from 10.8% as of December, and to build reserves to cover at least three months of imports.
“That is going to be an important trigger to provide comfort to the rating agencies in terms of growth sustainability,” the minister said.
The country’s progress towards reprofiling its energy debt with China is also on the radar of the rating agencies.
Aurangzeb said discussions on extending maturities and tariff reductions had begun, although it was still early days.
China has financed 18 completed energy projects in Pakistan worth over US$15bn combined and signed contracts for a further three under the China-Pakistan Economic Corridor.
Pakistan last year appointed CICC and Habib Bank as advisers on the reprofiling.
“We have been very much committed to making those debt repayments and so it may be that we have to pay more at the end of it, but we were looking for that temporary reprieve," Aurangzeb said.
Domestic revival
Progress on curbing inflation has also allowed the central bank to gradually ease monetary policy, with the policy rate now down to 13% from a high of 22% last year.
That could encourage corporates to return to the domestic bond market, rather than relying on bank financing.
“I think some of the larger conglomerates should be actually thinking through that as we go forward,” Aurangzeb said.
He added he has also been in conversation with the country’s banks on securitisation opportunities and acknowledged the role that improving secondary market liquidity will play in reviving the market.
Efforts to move to a fully Islamic banking system by 2027 following a sharia court ban on interest in 2022 could also shape that development, as it implies only sukuk instruments could be permitted beyond the deadline. Aurangzeb did not give further details on the ruling’s implications, noting only that banks were in the process of converting and that the changes would need to occur “in the context of our international obligations”.
“In any case we are on that journey, and let's see how far we get,” he said.