Tuesday, July 16, 2024

Pakistan’s default risk shoots up to 92.53%

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. The 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 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.  

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

Lack of confidence in Pakistan’s ability to repay the maturing debt

The yield (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’s ability to repay the maturing debt.  

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

Yields on the other two bonds, worth a total of $2 billion and 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). It partly blocked foreign currency flows into the country.  

Foreign exchange reserves depleted

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

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