Hello again,
The latest from Pakistan is that we are making good progress but against a backdrop of increased security threats. There are much better sources than me about the militants and the reaction from government (Tribune and Dawn newspapers are good) so I’ll stick to talking about my specialty, corporate finance.
We have been able to negotiate some significant improvements to the environment for private placement and bond financings, especially for sukuk (Shariah compliant) issues. The government has approved important changes to the tax treatment of sukuks that serve to level the playing field. In addition, we have strengthened the discipline of trustees in bond indentures to enhance protection to investors. Currently we are working to improve asset backed securities (ABS) regulations to make that form of financing much more attractive and secure.
Meantime the economy has been broadly helpful with most statistics quite reasonable although moving in the wrong direction. GDP growth this year is running nearly 5% and CPI inflation is at about 4% but rising. The current account deficit is only 1-2% of GDP, while the fiscal deficit is at about 5% of GDP, with both measures growing. These have led to increases in external debt, something currency traders are watching very closely.
The real bellwether for the market is the PKR 100 billion sukuk for the Water and Power Development Authority (WAPDA). This long-term financing was structured to complete the Neelum Jhelum hydroelectric project. To sell a ten-year deal at effectively 1% over an adjustable short term interbank rate is a testament to market liquidity and risk appetite. Admittedly it is also an indication of inflation expectations.
In parallel, last month we were asked to present a series of seminars on corporate bonds and sukuks. These were targeted to institutional investors and bankers with a view toward a more sensible, sophisticated approach to risk and investing.
One of the courses was offered in Peshawar, which is right up near the tribal areas. This particular seminar took place the day before the recent upsurge in violence, which public opinion pins on Afghans coming across the border in that area. We had no problems at all but I’m hesitant to return in the short term. In fact, we had a very warm welcome as indicated by the photograph below.
The latest from Pakistan is that we are making good progress but against a backdrop of increased security threats. There are much better sources than me about the militants and the reaction from government (Tribune and Dawn newspapers are good) so I’ll stick to talking about my specialty, corporate finance.
We have been able to negotiate some significant improvements to the environment for private placement and bond financings, especially for sukuk (Shariah compliant) issues. The government has approved important changes to the tax treatment of sukuks that serve to level the playing field. In addition, we have strengthened the discipline of trustees in bond indentures to enhance protection to investors. Currently we are working to improve asset backed securities (ABS) regulations to make that form of financing much more attractive and secure.
Meantime the economy has been broadly helpful with most statistics quite reasonable although moving in the wrong direction. GDP growth this year is running nearly 5% and CPI inflation is at about 4% but rising. The current account deficit is only 1-2% of GDP, while the fiscal deficit is at about 5% of GDP, with both measures growing. These have led to increases in external debt, something currency traders are watching very closely.
The real bellwether for the market is the PKR 100 billion sukuk for the Water and Power Development Authority (WAPDA). This long-term financing was structured to complete the Neelum Jhelum hydroelectric project. To sell a ten-year deal at effectively 1% over an adjustable short term interbank rate is a testament to market liquidity and risk appetite. Admittedly it is also an indication of inflation expectations.
In parallel, last month we were asked to present a series of seminars on corporate bonds and sukuks. These were targeted to institutional investors and bankers with a view toward a more sensible, sophisticated approach to risk and investing.
One of the courses was offered in Peshawar, which is right up near the tribal areas. This particular seminar took place the day before the recent upsurge in violence, which public opinion pins on Afghans coming across the border in that area. We had no problems at all but I’m hesitant to return in the short term. In fact, we had a very warm welcome as indicated by the photograph below.
Here, Iftikar Ul Amin, Deputy Director of the Institute of Management Sciences, greets us as we arrive at the seminar venue, a very modern auditorium on the campus. Note that we are accompanied into the building by an armed guard at the left of the frame. You can see his hand is grasping the gun barrel.
The hospitable environment continued inside as the audience took the coursework very seriously, with good questions and a healthy back and forth on some of our ideas. There were a lot of concepts to explain and data to present, summarize and interpret but the participants kept up the pace. My central thesis is that corporate bonds in Pakistan offer a return that more than justifies the attendant risk. When we put this into an international context of competing investments, the point is magnified and strengthens our case. I’m not aware that there has been any immediate rebalancing of institutional portfolios as a result, but the idea has been planted and justified, to be reinforced by market action, the best teacher.
While in the event the reaction was excellent, it wasn’t until several days later that I saw this picture.
The hospitable environment continued inside as the audience took the coursework very seriously, with good questions and a healthy back and forth on some of our ideas. There were a lot of concepts to explain and data to present, summarize and interpret but the participants kept up the pace. My central thesis is that corporate bonds in Pakistan offer a return that more than justifies the attendant risk. When we put this into an international context of competing investments, the point is magnified and strengthens our case. I’m not aware that there has been any immediate rebalancing of institutional portfolios as a result, but the idea has been planted and justified, to be reinforced by market action, the best teacher.
While in the event the reaction was excellent, it wasn’t until several days later that I saw this picture.
This is perhaps not the most flattering photograph of me, but note the close attention of the MBA candidates in the hall. Sometimes as a speaker you are so focused on your arguments and data that you miss the reactions. The body language here of the participants says to me that they want to understand and internalize the lessons. The tea break conversations confirmed their interest.
All of this has kept me busy but I’m always happy to hear from you. So please send me a line with your news and ideas. Until then, all the best.
All of this has kept me busy but I’m always happy to hear from you. So please send me a line with your news and ideas. Until then, all the best.
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