On November 22, Pakistan’s benchmark five-year Credit Default Swap (CDS) fell by a massive 5,224 basis points to 71.64%, according to data released by a brokerage house.
Arif Habib Limited (AHL) crunched the numbers. Over the weekend, the cost of insuring exposure to Pakistan’s five-year sovereign debt increased by 1,224 basis points, reaching an all-time high of 92.53%.
According to analysts, the rate at these levels reflects a certain default, and the country’s sovereign dollar bonds will remain vulnerable until the political standoff between the government and the Imran Khan-led PTI is resolved.
“The situation on the ground is challenging but not as grave as reflected by the current CDS rate,” an analyst said. “The margin for any misadventure was thin, for sure.”
According to Khurram Schehzad, CEO of the Alpha Beta Core financial advisory firm, the country’s likelihood of defaulting on its obligations is not too high to cause concern.
“Pakistan’s credit default risk, measured appropriately by probability of default, is only around 10%,” Schehzad said in a tweet, citing data from Bloomberg Economics.
He stated that it was diametrically opposed to overhyped, incorrectly explained, and most illiquid CDS and their price distortions.
“CDS is insurance and there is a lot of difference between probability of default and buying insurance on an asset to protect repayments, which depends on investors,” Schehzad added.
Pakistan's credit default risk, measured appropriately through probability of default, is only around 10%!
Totally opposite to unnecessarily-hyped, wrongly-explained and most-illiquid Credit Default Swaps, and their price distortions.@FinMinistryPak @StateBank_Pak @FaseehMangi pic.twitter.com/thvBjciWQo
— Khurram Schehzad™ (@kschehzad) November 22, 2022
Ishaq Dar, Federal Minister of Finance and Revenue, dismissed all speculations about an oil shortage and a widening credit default swap last week, calling them “baseless rumours spread on political goals.”
The finance minister told a press conference via video link that Pakistan will “absolutely not” default on its debt obligations.
Dar assured the people that the country’s next large payment — $1 billion in international bonds — would be made on time.
“We have never defaulted before. We will not even be close to default … Let me clear this categorically that the bond will be paid and there is no delay in this and even arrangements have been made in principal for upcoming payments in the next year,” he reiterated.
Pakistan’s economy is in turmoil, and its foreign reserves are rapidly depleting. As of November 11, the central bank’s foreign exchange reserves stood at $7.959 billion, enough for less than six weeks’ worth of imports.
Despite the recent rollover of Chinese debt and new World Bank and ADB infusions, reserves have been declining.
As negotiations with the International Monetary Fund (IMF) over the ninth review of the loan facility stall, the country’s external financial strains worsen.
Friendly nations have not made any firm funding commitments. Remittances are the second-largest source of income after exports, but they are also declining.
Along with deteriorating economic fundamentals, Pakistan’s political instability forced foreign debt markets to view its bonds for months as risky and politically unstable sovereigns.
According to Dr. Salman Shah, the former finance minister, “it’s political instability that has heightened anxieties for Pakistan and, in turn, has hiked debt insurance premiums for the country’s bonds.”
Shah claimed that the market was waiting for the government to act to alter how foreign investors saw Pakistani bonds. “First and foremost, the army chief should be named as soon as possible and without controversy. The political environment in the nation will become more stable as a result,” Shah said.
Second, the $1 billion Sukuk repayment due on December 5 should be made on time. Third, a plan for the elections that was acceptable to all political parties had to be announced. If these actions were taken, the CDS would begin to fall immediately, he predicted.
If not, everything would spiral out of control. The IMF was currently not providing Pakistan with significant support, he added. “Since Pakistan must secure external financing to pay its foreign debt obligations, the economy demands complete attention. Therefore, it is necessary to carry out the IMF’s programed in letter and spirit, conduct structural reforms, particularly in the energy sector, and enhance the investment climate in the nation,” said Dr. Shah.
According to Fahad Rauf, head of research at Ismail Iqbal Securities, an important event will be the upcoming $1 billion payment on Sukuk, which will boost market confidence.
To read our blog on “SBP limits the flow of dollars,” click here
