The idea of exchangeable bonds

THERE is plenty of advice from various sources for the economic managers of the country. According to the latest reports, world’s top financial institutions have advised the government of Pakistan to go for exchangeable bonds rather than opting for conventional bonds whose costs would be too high due to political uncertainty in the country. In order to persuade the authorities to follow this course of action, international banks like Morgan Stanley, ABN-Amro, Merrill Lynch, Citibank and Goldman Sachs are closely watching the latest political developments in the country and have already dispatched their teams to Islamabad to give detailed presentations on the most feasible options for floating bonds. Exchangeable bond, it may be mentioned, is the one issued by a company or a sovereign which can be exchanged at the investors’ option at any time throughout the life of the bond into a fixed number of ordinary shares of another company. Some of the leading financial institutions are also proposing that the government go for International Islamic Sukuk, which they could help it to launch successfully. Besides, international banks are reported to have advised the Finance Ministry that economic managers headed by the Finance Minister in the incoming government should arrange a tour of some of the financial capitals, to hold meetings with the investors and take them into confidence, for which they were prepared to extend all possible assistance. Why most of the international financial institutions are making a beeline for Islamabad is very much obvious. Faced with a huge current account deficit, Pakistan needs to borrow heavily from the international financial markets to tide over the ugly situation and avert a sharp depletion in foreign exchange reserves of the country. The issuance of bonds denominated in foreign currencies is a way to raise such borrowings and the main features and characteristics of these bonds are determined by the issuers keeping in view the nature of their requirements, likely response and the estimated cost (rate of return) to be paid to the investors. However, the cost calculation and, therefore, preference of the issuers could change over time.
In Pakistan’s case, the advice of international banks to prefer exchangeable bonds is primarily based on political uncertainty currently prevailing in the country which has made the issuance of conventional bonds a relatively unattractive proposition. Nonetheless, the authorities of our country need to be wary of their proposition. In our view, the political situation of the country is not as risky as generally perceived by the foreigners. Of course, some turbulence cannot be ruled out altogether, but Pakistan appears to be headed for a democratic order which would impart stability to the political process in the not too distant future. Also, the advice of the international banks needs to be considered with a pinch of salt because generally they have their own axe to grind and are more concerned with the fees for their services. It does not make economic sense for Pakistan to enter the international bond market when the risk factor, ie credit default swap, is hovering between 550 to 600 basis points above LIBOR. If the past record is taken as a guide, the lowest CDS for Pakistan has been 150 bps and on the average has been in the range of 200 to 250 bps. Therefore, until CDS for Pakistan comes down to below 300 bps and the dust in the international market (at present in turmoil) settles it would be more prudent to wait. The best alternative for the country would undoubtedly be to strike at the root of the problem rather than treating its symptoms. The interest of the international banks to engage the authorities in selling various kinds of bonds is primarily due to the expected demand of the country for foreign currency loans on account of mounting deficit in the external sector.




Enduring tensions

OF all the issues tackled by the recently concluded summit of the Organization of the Islamic Conference in Dakar — from the Palestinian conflict to Islam in the West to the ratification of a new OIC Charter — yet another Chadian and Sudanese peace agreement was the highlight. What the accord in practice means for Sudanese President Omar Bashir and his Chadian counterpart Idriss Deby has yet to be spelled out, but there are numerous underlying concerns. The first is governmental incompetence in both Chad and Sudan. Another problem is the demoralization of the populations. This, after all, is the fifth deal signed between the two countries. There is no love lost between the two presidents, and by all accounts the Dakar deal was agreed upon amid much recrimination. The Chadian authorities, in particular, have grave reservations, believing that the Sudanese government is trying hard to undermine the regime in N’Djamena. The Chadians have persistently claimed that the Sudanese government is backing armed opposition groups in Chad, and were directly responsible for last month’s attempt by opposition forces to storm the capital. The Sudanese, on the other hand, counter that the Chadian authorities are instigating the fighting in Darfur, aiding and abetting armed opposition groups. Which is why peace between Sudan and Chad cannot endure without the permanent resolution of the Darfur crisis.
No month passes without shooting in either Chad or Darfur. The ethnic composition in both Darfur and Chad is very similar. Tribes move freely across the extensive and porous common border. The oil-rich countries are still among Africa’s — and the world’s — poorest nations. There are also tensions related to the exploitation of the resource. Indeed, oil appears to be more of a curse than a boon. Across the border in Chad, French oil multinationals predominate, even though American oil firms have also recently become active in the country. While oil fuels these wars, the humanitarian catastrophe as a result of the war is escalating daily. The armed opposition groups in both Sudan and Chad will not give up their struggle for power in the foreseeable future. They also are determined to enjoy the benefits of the newfound oil wealth. Confidence for the prospects of democracy in either Chad or Sudan is not great. While the West turns a blind eye to Chad’s human rights record, it is vociferously anti-Sudanese. Strident advocates of human rights in the West hardly mention Chad. The onus is on Sudan where Darfur has become the cause celebre of Western media and governments. Khartoum and N’Djamena are still digesting the implications of the deal. The deal, like the OIC summit meeting itself, was a qualified success. The Chadian and Sudanese leaders have made giant strides to secure a semblance of peaceful coexistence. However, a big shift toward more friendly bilateral relations is highly unlikely.

—Arab News