Pakistan’s default risk worsens

Karachi:  The perception of Pakistans risk of default has worsened with the five-year credit default swap (CDS) surging by 30 percentage points in a week to 93 per cent ahead of the repayment of $1 billion for a maturing international bond early next month.

According to a research house, the CDS had been at 4.2 per cent in January 2021, The Express Tribune reported.

Finance Minister Ishaq Dar and many financial experts have reiterated that Pakistan will not default on any of the international payments and that volatility in the CDS had nothing to do with the country’s default risk.

However, a section of global and local experts and bond investors saw the rise in the CDS as a threat to their receivables, The Express Tribune reported.

Yields (rate of return) on the $1 billion international bond (Sukuk), which is maturing on December 5, soared to 120 per cent on Monday from around 96 per cent on November 18, indicating the investors’ lack of confidence in Pakistan whether it would be able to repay the maturing debt.

The yield was hovering at less than 10% before the Covid-19 outbreak in February 2020 in Pakistan, when the investors had high confidence in Pakistan’s capacity to repay them.

The developments came amid a delay in the ninth review of Pakistan’s economy by the International Monetary Fund (IMF), which partly blocked the foreign currency flows into the country.

Accordingly, the foreign exchange reserves depleted to a critically low level of $8 billion against over $20 billion in August 2021, weakening the country’s capacity to make international payments, Express Tribune reported.

Arif Habib Limited Head of Research Tahir Abbas said that the “CDS is a premium that investors pay to insure their investment in bonds against the risk of default”.

“This, however, should not be taken as an indicator of the risk of default.”


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