Finance counsels

Pakistan may offer as much as $1 billion of bonds and resume selling state assets in the coming months, Finance Minister Shaukat Tarin said, as the government forecasts a widening budget deficit amid rising war costs.

“We have made all the arrangements and we will conduct roadshows in the next couple of months,” Tarin said in an interview in Singapore yesterday. The government may sell about $500 million each of euro-denominated and Islamic bonds, totaling no more than $1 billion, he said.

The country will try to sell state assets in the fiscal year starting in July after pausing for the past two years because of market conditions, he said after meeting investors to update them on Pakistan’s economy.

Pakistan’s budget deficit may widen to 5.3 percent of gross domestic product against a target of 4.9 percent in the year ending June 30 because of higher spending, including the cost of fighting militants in tribal areas, Tarin said on Jan. 27. The country was forced to turn to the International Monetary Fund for a bailout to avert defaulting on its debt in 2008.

“A global bond offering from Pakistan may be more feasible in a few months as global economic conditions improve,” said Asad Farid, an economist at AKD Securities Ltd. in Karachi. “The risk premium is very high so it’s better for the government to opt for funds from donors rather than the markets.”

Debt Protection

The cost of protecting against Pakistan defaulting on its bonds will probably fall from current levels as the government begins to market more debt, Tarin said.

Credit-default swaps protecting the debt of Pakistan rose 27.5 basis points to 950 basis points as of 9:48 a.m. in Singapore, according to prices from Royal Bank of Scotland Group Plc. The cost of protecting the country’s debt has fallen from 3,084.3 basis points on Jan. 1, 2009, to 870.5 yesterday, according to prices from CMA DataVision in New York.

Demand for emerging-market debt may be hurt as countries including Spain, Portugal and Greece struggle to finance their budget deficits. Portugal’s public debt will rise to 91 percent of GDP by 2011, according to European Commission forecasts. Greece’s debt will climb to 135 percent of GDP and Spain’s will increase to 74 percent. Portugal and Greece led a surge in the cost of insuring against losses on European sovereign debt to a record yesterday.

Vietnam raised $1 billion from its second global bond sale last week, offering higher yields than lower-rated Philippines and Indonesia, amid the busiest start to a year for global borrowing by developing nations since 2005.

New Tax

Pakistan also plans to introduce a value-added tax to boost revenue in the next fiscal year, Tarin said. The state’s revenue targets are “intact,” he added.

The country sold local Islamic bonds worth 14.4 billion rupees ($170 million) in September. Islamic law bans the payment and receipt of interest, prohibits investment in businesses tied to gambling and alcohol, and stresses profit-sharing.

The IMF on Aug. 8 agreed to increase a loan to Pakistan by $3.2 billion, after the nation was forced to turn to the Washington-based lender for a $7.6 billion bailout in November 2008. Pakistan is expecting $2.2 billion of aid and loans from the U.S. and Japan before June 30, which may help bridge the government’s financial gap, Tarin said last week.

The Friends of Democratic Pakistan, an aid group that includes the U.S., U.K., Japan and Saudi Arabia, may provide $1.4 billion to $1.8 billion to Pakistan in the current fiscal year ending June 30, Tarin said yesterday.

Foreign Aid

The group, formed in 2008 to provide help to the nation at the forefront of the fight against terrorism, pledged $5.3 billion in aid in April.

The South Asian nation’s war against Taliban guerillas in the country’s northwest has hurt the economy. More than 3,000 people were killed in terrorist attacks in Pakistan last year, according to the Pakistan Institute for Peace Studies in Islamabad.

Growth in the 12 months ended June 30, 2009, cooled to 2 percent, the slowest pace in eight years. The $168 billion economy may expand 3.4 percent this fiscal year, Tarin said yesterday, reiterating an earlier government forecast.

The State Bank of Pakistan kept its benchmark interest rate unchanged at 12.5 percent on Jan. 30 amid accelerating inflation, after reducing the rate by 2.5 percentage points from April to November last year.

Interest Rates

Pakistan aims to bring interest rates lower when inflation eases, which won’t happen “in the next couple of months,” Tarin said. Inflation will average about 11 percent this fiscal year and 6 percent to 7 percent the following year, he said.

Consumer prices rose 10.52 percent in December, the most in four months. The inflation rate may climb further after the government last month raised power tariffs by 14 percent and increased gas prices by as much as 18 percent to help contain its budget deficit.

Foreign direct investment may total as much as $5 billion in the next fiscal year, including asset sales by the government, Tarin said.

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Filed under: money by Guru