ADB FUNDED PROGRAM

Strengthening secured transactions framework in Pakistan

AMANULLAH BASHAR
Sep 03 - 09, 2007

The Strengthening Secured Transaction Framework Project is being funded by the ADB under its Technical Assistance (TA) Program for Pakistan. The Ministry of Finance is the Executing Agency, while SBP is the Implementing Agency for this TA project along with the consultancy firm, ISC, Hong Kong.

In this respect, the State Bank of Pakistan, in collaboration with the International Securities Consultancy Limited (ISC), Hong Kong, organized a one-day awareness and consensus building workshop on Strengthening Secured Transaction Regime in Pakistan at Karachi.

The objective of the workshop was to familiarize the participants about the international best practices in secured transactions and the initiatives of Government of Pakistan and SBP to reform the secured transaction registry system in Pakistan with the view to get stakeholder feedback on the work being carried out by the ISC consultants. The secured transactions framework will help increase SME and Agriculture sectors' access to finance by creating a registry system to register charge on various kinds of properties, especially immovable properties.

Chaired by Qasim Nawaz, Director SME & Microfinance Department, SBP, the workshop was attended by bankers, officials of the federal and provincial governments as well as officials of NADRA and CDC (Central Depository Company).

The ISC Consultants Prof. Ron Harmer and Ms. Elaine MacEachern speaking on the occasion apprised the participants about the international best practices in Secured Transactions and emphasized on the need of establishing secured transaction registry system in Pakistan that can facilitate the creation and enforcement of collateral interest in movable and immovable assets by improving policies, laws and regulations.

REPORT ON PAKISTAN MARKET

Meanwhile a report on Pakistan says that Pakistan's domestic bonds yields and spread (between 2 and 10 year bond yields) by and large remain intact despite jittery politics and slide in international bond yield. To us this suggests that the market still expects strong macro growth in years to follow and is not panicking about the potential impact of domestic politics on Pakistan's macro growth.

DOMESTIC YIELD CURVE REMAIN FLAT

Despite the increased volatility of domestic politics and a significant slide in the international bond markets, Pakistan's domestic bond market yield curve (a measure of risk aversion) has flattened further even compared to 6 months ago.

The spread between 2 and 10 year bonds which stood at a 100bp on Dec 31st 2006 has narrowed to 70bp currently. To us this suggests the market has not panicked about domestic politics potentially impacting economic growth and we continue to expect robust growth outlook in the years to follow.

...while volatility reigns in Pakistan's international bond yields

In comparison, Pakistan's international bond yields depicted nightmarish volatility over the last couple of months, primarily on account of jittery politics and international bad press. We believe however, that the volatility in Eurobonds is exaggerated by the relative illiquidity of the instrument and by any standard a 400bp spread over US Treasury (UST) is not justified. We believe this should recover and the spread of Pak Eurobond over UST should settle down at not more than 250bp.

This can be validated from domestic bond market price movements.

PAKISTAN MACROECONOMIC GLIMPSE

Pakistan is expected to achieve 6.9% GDP growth in FY08 driven by robust domestic consumption. With exports coming in at less than 12% of GDP, Pakistan remains largely uncorrelated to any global slowdown, in particular a slowdown in the US. In addition, Pakistan's external sector is less vulnerable to the current global credit squeeze, primarily due to lower exposure to foreign portfolio investment compared to regional peers. As a result, we expect Pak Rupee exchange rate, foreign exchange reserves and the external account will remain resilient to changes in global growth and credit outlook. Due to robust domestic consumption in Pakistan, in the recent policy statement SBP raised the discount rate.