The perception of Pakistan’s risk of default has worsened with the five-year credit default swap (CDS) surging by 30 percentage points in a week to 93% on Monday 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% in January 2021.
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.
Yields (rate of return) on the $1 billion international bond (Sukuk), which is maturing on December 5, 2022, soared to 120% on Monday from around 96% on Friday, 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.
Yields on the other two bonds worth a total of $2 billion maturing in 2024 and 2025 also increased during the day.
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.
If we take a look at the big picture, Pakistan stands eleventh among the emerging markets in terms of default risk. Some may argue that this means the situation is not as desperate as some reports suggest, there is no denying that there is no room for complacency.
Pakistan’s economic managers must realise that it was a default on foreign currency sovereign debt and not multilateral or bilateral debt that led to political upheaval in Sri Lanka a while back. What’s more, the challenges facing our economy are real and substantial. We have to fork out $1 billion to investors for a Eurobond issue in just over a week.
Our foreign exchange reserves are barely adequate to finance six weeks of imports as of now. This outflow, due on December 5, will stretch out forex holdings thin barring another major liquidity injection via bilateral debt or development finance, none of which is on the horizon.
Looking at the immediate context, import compression in recent months has hurt the government’s already inadequate revenue, and sagging exports and remittances are eating into the country’s hard currency reserves as well as widening the current account deficit.
These are all ill omens, especially at a time when a looming global recession is threatening to squeeze the world, sending shockwaves across all national economies. The destruction wrought by this monsoon’s cataclysmic flooding has taken a terrible toll on the economy, necessitating food and commodity imports and strapping industries with higher input costs.
Then there is the colossal task of reconstruction in the wake of this disaster, the likes of which our country has never seen before. But probably the most urgent of all challenges to the economy is the political risk hovering over our horizons. One hopes the government can quickly push through the long-drawn-out November appointment matter, and steer the nation towards political stability.