Pakistan’s default risk hits a 13-year-high, reflecting foreign investors’ lack of faith

The risk of default for Pakistan, as determined by the 5-year credit default swap (CDS), increased on Tuesday by 3.07 percentage points in a single day to reach a 13-year high of 52.8 per cent, indicating that foreign investors no longer have confidence in the nation.

Before the Covid-19 outbreak in Pakistan in February 2020, the CDS was between 5 per cent and 6 per cent.

According to Express Tribune, owing to uncertainties surrounding the renewal of the International Monetary Fund (IMF) loan programme, it peaked at over 30 per cent in the middle of this year.

Later, as the major lender resumed its $6.5 billion programme in late August 2022 and subsequently released a $1.2 billion tranche, the CDS experienced a small recovery.

Today, meanwhile, it is rapidly rising once more, indicating that international investors now believe Pakistan will not be able to pay back its maturing debt.

On December 5, 2022, the country is required to repay $1 billion to overseas investors against the maturity of the 5-year Sukuk.

The 5-year Third Pakistan International Sukuk’s yield (rate of return) is quite high, hovering at 145 per cent. Before the Covid-19 epidemic, it was around 10 per cent.

In addition, the yield on bonds due in 2024 and 2025 is currently high at 90 per cent and 57.5 per cent, respectively, up from a low of 10 per cent in the past.

The country’s foreign exchange reserves have decreased by about $9 billion over the past 10 months, which has caused alarm among the foreign investors.

They are currently only covering about 1.10 months’ worth of imports at $7.6 billion, down from $20 billion (three months’ worth of imports) in August 2021.

Ishaq Dar, the finance minister, and Miftah Ismail, his predecessor, have taken every precaution to avoid the likely default.

They have repeatedly reassured the foreign investors that when the time came, the nation would easily repay the maturing $1 billion in December as well as fulfil other international payment obligations.

Foreign investors are receiving warnings from the situation that the nation may default.

However, the leadership of the nation has fully secured the $36–40 billion needed from international lenders for the current fiscal year 2023 to pay off the nation’s approximately $21 billion in foreign debt, finance approximately $10–12 billion current account deficit, and increase its foreign exchange reserves to approximately $16 billion by June 30.

According to experts, the country’s foreign exchange reserves will increase and confidence among foreign investors will be restored with the arrival of $1.5 billion from the Asian Development Bank (ADB) in a few days and another $500 million from the Asian Infrastructure Investment Bank (AIIB) in the current month.

They continued by saying that the inflows should also aid in lowering bond and CDS yields.

Experts said that Saudi Arabia was the destination of Prime Minister Shehbaz Sharif’s official visit. The host nation has declared that it is resuming its investment ambitions, which include establishing an oil refinery in Pakistan for an investment of $10 billion.

The Kingdom’s investment choice coming to fruition will also aid in regaining the trust of foreign investors in Pakistan.

When PM Shehbaz travels to the second-largest economy in the world in November, the nation is also anticipated to get a rollover loan from China worth $6.3 billion, they claimed.