Pakistan’s default risk worsens

KARACHI:
Perception of Pakistan’s default risk has worsened, with the five-year credit default swap (CDS) rising 30 percentage points in a week to 93% on Monday, ahead of $1bn of international bonds due at early next month.

In January 2021, the CDS was 4.2%, according to the research center.

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

However, some global and local experts and bond investors saw the growth of CDS as a threat to their accounts receivable.

Yields (yields) on $1 billion worth of international (sukuk) bonds due December 5, 2022 soared to 120% on Monday from about 96% on Friday, signaling investor mistrust in Pakistan. be able to pay the debt.

Yields hovered around less than 10% until the February 2020 Covid-19 outbreak in Pakistan, when investors were confident in Pakistan’s ability to pay them.

Yields on two other bonds totaling $2 billion due in 2024 and 2025 also rose during the day.

The events occurred amid a delay in the ninth review of Pakistan’s economy by the International Monetary Fund (IMF), which partially blocked the entry of foreign currency into the country.

Consequently, foreign exchange reserves fell to a critical low of $8 billion from over $20 billion in August 2021, weakening the country’s ability to make international payments.

Tahir Abbas, head of research at Arif Habib Limited, said “CDS is a premium that investors pay to protect their bond investment against default risk.” “This, however, should not be taken as an indicator of default risk.”

He expressed his hope that Pakistan will receive billions of dollars in loans from multilateral and bilateral lenders in December 2022. “Pakistan is expected to receive between 6 and 8 billion dollars from the IMF, the World Bank, the Asian Development Bank ( ADB), Saudi Arabia and flood relief,” he said.

“Yes, some loans are tied to the IMF’s ninth review resolution,” he said, adding that political uncertainty has increased volatility. However, soon everything returned to normal.

rupee slides

The slow inflow of foreign loans compared to the July-October 2022 estimates increased the pressure on the rupee against
American dollar.

The national currency continued to fall for the sixth consecutive trading day, falling 0.22% (or Rs 0.49) to a fresh six-week low of Rs 223.66 against the US dollar in the interbank market on Monday.

Pakistan was only able to secure $4.2 billion in new loans in the first four months of the current fiscal year, compared with estimates of around $7 billion, Abbas said.

The pressure on the rupee will disappear with the reception of new loans. According to him, in the short term, the currency will remain at the current level.