Pakistan IMF bailout comes as foreign banks eye opportunity

News of Pakistan’s $6 billion loan deal with the IMF this week can be read in two ways: a country gaining direction and stability under a new government, or one in a desperate condition that has no choice but to do what a distant multilateral wants. But either way, the country is of increasing interest to foreign banks.

The IMF bailout has been a long time coming. Imran Khan, the prime minister who was elected last year, delayed approaching the multilateral for nine months while he sought other funds, successfully raising loans from Saudi Arabia, the United Arab Emirates and China.

A change of finance minister, and an apparent agreement to move to a market-determined exchange rate for the rupee, seems to have moved things forward; the appointment of Reza Baqir, a former IMF official, as the new central bank governor must also be considered relevant.

Bailout

News of the badly-needed bailout in Pakistan – which, as the IMF says, is “facing a challenging economic environment, with lacklustre growth, elevated inflation, high indebtedness and a weak external position” – was welcomed by foreign banks, who are showing increasing interest in the country.

In this respect, the mandate to advise on the privatization of two LNG-fired power plants in Pakistan, an intended $2 billion deal, was illustrative.

A consortium led by Credit Suisse, including local house Elixir Securities in the team, won the bid in March. That’s no surprise: Credit Suisse more than any other international bank has made a play to be a leader in frontier markets, from Pakistan and Vietnam to Cambodia and Papua New Guinea.

But it’s interesting to see who the other bidders were: Citi/United Bank; Standard Chartered/Alfalah CLSA/AKD Securities; JPMorgan/CICC/Habib Bank; Lazard Freres/Next Capital. (Alfalah CLSA is a joint venture between CLSA, owned by Citic Securities, and Pakistan’s Bank Alfalah, which involved CLSA taking a 24.9% stake in Alfalah Securities.)

It’s still possible that Belt and Road can do what it was supposed to for Pakistan – alleviate infrastructure bottlenecks and help to boost the economy and employment – but if that doesn’t happen, Pakistan could be stuck with an unsustainable debt load 

It’s an interesting sign of the times to see some of the most venerated names in American investment banking bidding for a Pakistan power privatization. And they wanted it, too: contrary to claims that Credit Suisse wins business by bidding low, the lowest bid was actually from the Citi consortium (JPMorgan’s was the highest). Credit Suisse’s winning bid was $11.6 million.

The deal will involve the sale of National Power Parks Management, a state-owned firm that runs a 1,240MW plant called Haveli Bahadur Shah, and a 1,223MW plant called Balloki, both in Punjab province.

The finance minister at the time of the announcement, Asad Umar, had told bidders he wanted the transaction closed by June last year; it is thought that all bidding banks tried to stress that this was unrealistic, and the end of the year is more likely. Last month Umar resigned and it will be his successor Abdul Hafeez Shaikh, along with Privatisation Commission secretary Rizwan Malik, who oversee it now. More privatization bids are in the works.

Pakistan needs the money, notwithstanding the IMF deal: the budget deficit could reach 7% of GDP. Furthermore, the IMF deal as it stands could impede government promises to improve education, healthcare and support for the poor. Generally, the more money Pakistan can raise from whatever source, the better.

Stability

Although the IMF deal will be seen as a failure in some respects – Khan had criticized previous governments for going cap-in-hand to the IMF, with this new one being the 22nd IMF deal since 1958 – it does add some stability to the country’s position. The IMF deal requires taxes and energy prices to rise, and will probably reduce growth, expected to be 3% this year compared to 5% last year (and well below the 7% needed to keep the growing population in sufficient jobs). But there is a sense that two or three years of tough work could see the country into a better financial position.

Certainly, the state of the country’s finances doesn’t appear to have rattled Credit Suisse’s internal risk committees. Over the last year or so the bank has been sole originator for a $220 million syndicated term loan to the Ministry of Finance (the bank’s ninth such facility to the government), original lender for a $350 million term loan to Pakistan Water and Power Development Authority (WAPDA), original lender for a $115 million syndicated term loan for airline PIA, and various other advisory or arranging roles.

The WAPDA deal was the ballsiest: the first corporate loan in Pakistan with partial guarantees from the International Development Association of the World Bank and Pakistan’s Ministry of Finance, with Credit Suisse as sole lender on an unsecured 10-year loan with a 6-year grace period. The deal supports a hydro power plant.

Other foreign banks with a track record in the country include Standard Chartered, Citi and, since the Chase days, JPMorgan. Granted, the big names on the power privatization shortlist weren’t necessarily committing balance sheet to the country – it is an advisory role – but clearly more and more banks are taking a close look. The CLSA Alfalah venture, announced in August, is also illustrative.

In the wings is China’s Belt and Road Initiative, for which Pakistan has always been pivotal. It has been a mixed blessing. There are supposed to be $62 billion of Chinese projects under way, but they’re not bringing employment, being built by Chinese state-owned companies, and they’re not bringing economic momentum either besides a one-off hit in the construction sector. The Khan government, cynical about Belt and Road before the election, has delayed some of these projects, and has had to seek development aid from Beijing in order to be able to honour its guarantee of repayments to China.

It’s still possible that Belt and Road can do what it was supposed to for Pakistan – alleviate infrastructure bottlenecks and help to boost the economy and employment – but if that doesn’t happen, Pakistan could be stuck with an unsustainable debt load. So Pakistan is looking interesting, but it’s also still looking perilous.

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