Pakistan’s chances of defaulting on its debt have cooled off in the past few sessions, with the cost of ‘insuring’ the country’s sovereign debt dropping below November’s devastating highs after yesterday’s “productive” talks with the International Monetary Fund (IMF).
According to data by Arif Habib Limited (AHL), Pakistan’s benchmark 5-year Credit Default Swap (CDS) declined significantly on 14 December by a whopping 3,168 basis points to 58.8 percent. The instrument has cooled down by over 31.6 percentage points in a single day and shows that investors aren’t willing to take on Pakistan’s default risk at a price level inferior to 58 percent.
While still high, the drop coincides with the State Bank of Pakistan’s (SBP) declining foreign exchange reserves, which remained less than $7 billion as of December 2, 2022, according to data released last week.
For Pakistan, debt markets are indicating a growing gap between emerging market (EM) corporate borrowers and their sovereign counterparts, as concerns grow about the country’s ability to refinance at higher rates. and the reluctance of multi-lateral lending partners in releasing dollars to the South Asian market.
Historically, spreads on Pakistan’s five-year CDS have more than quadrupled, rising from around 500 basis points in May 2021 to over 2,000 bps in the new financial year (FY23). Today’s standing still indicates a very high probability of default.
Former Finance Minister Miftah Ismail Tuesday warned that the path on which Pakistan is heading can take it towards default and urged the government to take measures that will avert such a situation.
“I believe that Pakistan should not default but I believe that path which we are on can take us towards default and the risk has increased,” the former minister said while talking to a private television channel.
In October, Fitch downgraded Pakistan’s long-term issuer default rating to CCC+ from B-, while Moody’s downgraded the country’s issuer and senior unsecured debt ratings to Caa1 from B3. Both cited liquidity risks in the aftermath of devastating floods as a major reason for their downgrades, while also mentioning depleting reserves.
Miftah warned that if the IMF suspends its program, Pakistan would not be able to avoid default. His comments echo the sentiments of the wider international market as well.
The ongoing bond market crunch has been compounded by the maddening uncertainty in Pakistan’s external liquidity and funding conditions. So far, Pakistan has received only around $4 billion during the first five months of FY23, compared to a gigantic full-year target of approximately $34-38 billion.
The yield (rate of return) on the 10-year Pakistan International Bond is currently around 64 percent.
As of 13 December, the yield on the 10-year bond maturing in 2024 increased by 2 basis points to 64.08 percent. The yield on a 10-year bond maturing on September 30, 2025, increased from almost 40.46 percent to 40.52 percent. The yield on the 30-year bond maturing on April 8, 2051, decreased from 25.48 percent to 25.33 percent.
