Pakistan’s latest privatization reduces external vulnerabilities, a Credit Positive: Moody’s

KARACHI: The government of Pakistan raised more than $1 billion by selling its 41.5 percent stake in Habib Bank Ltd., the country’s largest bank. The stake sale, primarily to foreign investors, is credit positive because it will boost Pakistan’s international reserves, Moodys said.

The cushion from reserves, coupled with dwindling external debt repayments, will further diminish the sovereign’s likelihood of default. By shoring up revenues, the sale will contribute to fiscal consolidation and signals the government’s continued commitment to structural reforms primarily under the framework of its program with the International Monetary Fund (IMF).

Since last year, Pakistan has embarked on a privatization program that is one component of its $6.0 billion, three-year extended fund facility with the IMF that began in September 2013. The Cabinet Committee on Privatization has identified 24 public-sector enterprises that it will privatize through strategic private-sector participation, 11 via primary or secondary public offerings, and three via restructuring. The government aims to offer or market at least one transaction each quarter this year.

The Habib Bank offering is the government’s fourth minority stake sale. Last year, the authorities raised $387 million from the sale of shares in United Bank Ltd., $153 million from Pakistan Petroleum Limited and $150 million from Allied Bank Limited.

The government delayed an offering for the Oil and Gas Development Company Limited because of unfavorable market conditions. On the agenda for this year are strategic sales of several electrical supply companies, a construction company and Heavy Electrical Complex, an electrical manufacturing company.

Although capital market transactions so far have focused on profitable corporations and have met with relatively strong demand, the restructuring of loss-making public-sector enterprises such as Pakistan Steel Mills (unrated), Pakistan International Airlines (unrated) and Pakistan Railways (unrated), could prove more difficult. However, the government has kick-started the process by appointing financial advisors and approving a comprehensive restructuring plan.

The Habib Bank stake sale will significantly buffer Pakistan’s external position. Gross foreign reserves with the State Bank of Pakistan have climbed to $11.6 billion as of early April from $3.2 billion in January 2014. The steady increase in foreign reserves, although largely derived from higher external borrowing, has markedly improved Pakistan’s score on Moody’s External Vulnerability Indicator (EVI), which measures the adequacy of reserves relative to maturing debt in the next year. For the fiscal year ending June 2016, we estimate that the EVI will fall to 74.9% from a peak of 122.5% in fiscal 2014. Signaling confidence in its ability to sustain the pace of reserve accretion, the government agreed to raise by $1 billion the target for net international reserves (a performance criterion under the IMF program) to $6.8 billion by late June. Net reserves were $4.5 billion at the end of March.

The government will likely use any remaining proceeds from the stake sale to reduce its deficit and debt burden. Fiscal consolidation is the cornerstone of Pakistan’s program with the IMF, and Pakistani authorities have made significant progress in this area, reducing the fiscal deficit to 5.5% of GDP in fiscal 2014 from 8.2% the previous year. This year, the government is targeting a further decrease in the deficit to 4.9% of GDP, relying on its projection of a 16% year-on-year increase in revenues. Privatization proceeds will help shore up non-tax income, offsetting a likely slippage in tax revenue growth and helping to shrink the fiscal deficit. A portion of the proceeds could also be utilized for debt repayments.

The stake sale indicates the government’s strong commitment to structural reforms, via its continued efforts to complete the IMF program, a key factor behind our March revision in the outlook on Pakistan’s sovereign bond rating to positive from stable. So far, the authorities have cleared six reviews, receiving $3.5 billion of financial assistance. At the conclusion of the sixth review last month, the IMF commended Pakistan’s strong performance under the program, but underscored the need to build on progress made so far on restoring economic stability.

 

 

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