DEBT SETTLEMENT OF DUBAI WORLD BRINGS RELIEF TO PAK BANKS
Dec 21 - 27, 2009
The debt settlement of Dubai world especially a prop of $10 billion by Abu Dhabi has provided much relief to Pakistani banks especially the United Bank, which had an exposure to Dubai World worth US$20 millions, it is learnt.
The UBL exposure accounts for 2% of the total UAE book, sources said adding it is below 0.3% of the total loan book. However the debt settlement by Dubai World would reduce the concerns about accretion in the infected portfolio of UBL.
In Pakistan companies including PTCL, Bank Alfalah and UBL have UAE-based sponsors while Adamjee Insurance and Cement companies have direct exposures to the UAE market.
Abu Dhabi has provided $10 billion to help Dubai World, the state-owned holding company, meet its obligations, including $4.1 billion needed to repay an Islamic bond maturing for its real-estate wing, Nakheel PJSC.
Dubai will use the rest of the money to pay "trade creditors and contractors as well as meet interest expenses and company's working capital through April 30, 2010. Dubai World has said that it is seeking to restructure $26 billion of debt, less than half the $59 billion of liabilities it had at the end of 2008.
Nakheel, which is building palm tree- shaped islands off the emirate's coast, posted a first-half loss of 13.4 billion dirham ($3.65 billion) as revenue fell and it wrote down the value of land and property.
It may be mentioned that Nakheel's repayment on the $3.52 billion bond was the biggest maturity for a Dubai entity since global credit markets froze after the September 2008 collapse of Lehman Brothers Holdings Inc.
Nakheel accumulated debt during a five-year real- estate boom in Dubai, when the sheikhdom borrowed $10 billion and its state-controlled companies $70 billion to help diversify the economy. The company had liabilities of 73.3 billion dirham, including term loans of 16.3 billion dirham.
Nakheel's 2009 Sukuk redeems at 115.52 cents, increasing the total payment to $4.1 billion. The amount includes a 6 percent premium to bondholders because the company didn't do an initial public offering during the life of the bond, and the remaining part of the annual coupon.
It is also said that Dubai's government will also announce a "comprehensive reorganization law, a framework that is based upon internationally accepted standards for transparency and creditor protection. This law will enable Dubai World and its subsidiaries to achieve an acceptable restructuring of its remaining obligations."
Islamic bonds, known as Sukuk, are governed by Shariah laws barring investors from profiting from the exchange of money.
ELECTRONIC BONDS TRADING
The central bank intended to introduce an electronic bond trading platform early next year. This will provide investors real-time information about market yields resulting in enhanced liquidity and better price discovery in the fixed-income market.
Delivering a keynote address on "Developing the Next Generation Capital & Commodity Markets Ecosystem in Pakistan: Creating Value & Inclusive Growth in the Society" at the South Asian Federation of Exchanges (SAFE) Country Roundtable held at a local hotel in Karachi, Syed Salim Raza Governor State Bank of Pakistan said that in the initial stage only sovereign paper will be traded on the platform resulting in a liquid sovereign yield curve that would provide better representative benchmarks for issuance of corporate debt instruments.
This platform will also help in shifting government debt from banks to other institutional investors thus freeing up funds for private sector credit and facilitating the development of real economy. The State Bank during the last decade has been at the forefront of broadening not only the investment instruments and risk management tools but also supporting the broadening of the participants that have a need to use these to address their investment mandates.
SBP Governor said he believes that there is a room to accommodate more investor groups in the local currency government debt program and one such group might consist of investors currently accessing the National Savings Scheme (NSS).
He said it would be more efficient for the government and the investors to rationalize the issuance process. "This would enable an improved pricing strategy, eliminating the need to give away embedded put options which are available to investors at free of cost," he said and added it will also provide higher liquidity to the investors for their holding by making the debt fungible among all investors, residents and non-residents, corporate and individuals.
SBP feels that financial institutions have a significant role to play by assuming the role of financial advisors to the public in general. This would include selecting the appropriate mix of asset classes (equity, debt, commodity, real estate, etc.), setting liquidity/maturity targets, and planning services, and broaden their services of financial intermediation that enables them to invest and rebalance their retirement/investment portfolios periodically.
The central bank has played a role in supporting the price risk management activities by allowing the banks to provide financial intermediation in the currency & commodities hedging, interest rate risk management, etc. and would continue to do so as institutional activity evolves.
The government has now recognized that globalization and the maturity of Pakistan's economy will allow the prices of goods, especially ones that are politically sensitive like petroleum, to be set based on international prices.
He said Pakistan has essentially been a commodity-based economy with 65% of its exports (rice and cotton based) and 45% of its imports driven by commodities like petroleum, edible oil, and chemicals. For the last few years, the global markets have experienced quite a significant degree of price volatility that has put the individuals and the business at a disadvantage in their ability to manage commodity price inflation.
The key advantage of having institutions like National Commodities Exchange would be to provide price discovery and marking to market taking place in local time zone rather than to hedge price risk in European, Asian, or American time zone. It is expected that technological innovation would be at the forefront of such development, introducing transparent electronic trading and mechanism to minimize the resultant settlement and price risk.
PAKISTAN'S LIQUID FOREIGN RESERVES POSITION
The total liquid foreign reserves held by the country stood at $ 13,536.7 million on 12th December, 2009.
The break-up of the foreign reserves position is as under:-