Risk of default spikes to 13-year high of 52.8%

Pakistan's risk of default, measured by the 5-year credit default swap (CDS), on Tuesday spiked by 3.07 percentage points in a day and hit a 13-year high at 52.8%, suggesting foreign investors had lost their faith in the country.

The CDS hovered around 5% to 6% before the Covid-19 outbreak in Pakistan in February 2020.

It hit the then peak of around 30% in middle of this year over the uncertainty revolving around the revival of the International Monetary Fund (IMF) loan programme.

Later on, the CDS slightly recovered amid the global lender resuming its $6.5 billion programme in late August 2022 and subsequently releasing a tranche of $1.2 billion.

However, these days it is again climbing suddenly, signalling that foreign investors saw that Pakistan would fail to repay the maturing debt.

The country is due to return $1 billion to the foreign investors against the maturing of the 5-year Sukuk on December 5, 2022.

The yield (rate of return) on the 5-year Third Pakistan International Sukuk remain high around 145% these days. It hovered below 10% before the Covid-19 pandemic.

The yield on the bonds maturing in 2024 and 2025 also stands high at 90% and 57.5%, respectively these days, compared with below 10% in the past.

The foreign investors have panicked amid the country's foreign exchange reserves depleting by around $9 billion in the past 10 months.

They have dropped to a critically low level at around 1.10-month import cover at $7.6 billion at present compared with $20 billion (three-month import cover) in August 2021.

Finance Minister Ishaq Dar and his predecessor Mifth Ismail have taken all possible measures to avert the likely default.

They have assured the foreign investors time and again that the country would easily repay the maturing $1 billion in December and meet other international payment obligations as well when the time came in the future.

"The foreign investors have panicked following the global rating agencies Moody's and Fitch downgrading Pakistan's credit rating in the recent weeks," Ismail Iqbal Securities Research Head Fahad Rauf told The Express Tribune.

The two agencies have revised down the credit rating on the assessment that the domestic economy had suffered losses worth around $30-40 billion in the recent floods.

“The floods have multiplied the external financial crisis in the country, as it was already facing an economic slowdown amid the government's measures to cool down the then overheated economy,” Rauf added.

The situation is signalling to the foreign investors that the country would default.

However, the country's leadership has fully arranged the required $36-40 billion for the current fiscal year 2023 from global lenders to repay foreign debt worth around $21 billion, finance current account deficit of $10-12 billion and boost country's foreign exchange reserves to around $16 billion by June 30, 2023.

"The return of $1 billion against the maturing Sukuk in December would help restore the foreign investors' confidence in Pakistan. Accordingly, the CDS and yields on other bonds would come down," Rauf said.

Arif Habib Limited Research Head Tahir Abbas said the size of Pakistan's global bond market had reduced considerably these days.

Accordingly, a small trade in the bonds sharply fluctuated their yield.

"The CDS also faces the same dilemma of low investors' base,” Abbas observed.
He added that the increasing political instability in the country was also a reason behind the panic among the global investors in Pakistani bonds.

Both the experts said the receipt of $1.5 billion from the Asian Development Bank (ADB) in a few days and another $500 million from Asian Infrastructure Investment Bank (AIIB) in the ongoing month would increase the country's foreign exchange reserves and restore the global investors’ confidence.

They added that the inflows should help in reducing the CDS and bonds yields as well.

They noted that Prime Minister Shehbaz Sharif was on an official visit to Saudi Arabia.

The host country has said it was reviving its investment plans including setting up of a petroleum oil refinery at an investment of $10 billion in Pakistan.

The materialisation of the investment decision by the Kingdom would also help restore the global investors' confidence in Pakistan.

Similarly, the country is expected to receive a rollover debt worth $6.3 billion from China when PM Shehbaz visits the second largest global economy in November, they said.

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