Credit default swap for Pakistan falls to 71%

KARACHI: According to statistics supplied by a brokerage business, Pakistan’s benchmark five-year CDS fell a staggering 5,224 basis points to 71.64% on November 22.

Arif Habib Limited computed these numbers (AHL).

Over the course of the weekend, the cost of covering exposure to Pakistan’s five-year sovereign debt increased by 1,224 basis points, reaching its highest-ever level of 92.53%.

Analysts worried that the country’s sovereign dollar bonds will continue to be at risk until the political impasse between the government and the Imran Khan-led PTI is resolved, saying the rate at these levels signals a certain default.

“The situation on the ground is hard but not as dire as portrayed by the current CDS rate,” an expert said. “There was really little room for error.”

According to Alpha Beta Core CEO Khurram Schehzad, there is no reason to be alarmed if the nation defaults on its debt.

According to data from Bloomberg Economics, “Pakistan’s credit default risk, evaluated accurately by chance of default, is only around 10%,” Schehzad claimed in a tweet.

He claimed that it stood in complete contrast to the overhyped, incorrectly explained, and highly liquid CDS and associated price distortions.

“CDS is insurance, and there is a big difference between buying insurance on an asset to cover repayments, which depends on investors, and probability of default,” stressed Schehzad.

Ishaq Dar, the federal minister of finance and revenue, dismissed the rumours last week, calling them “baseless rumours being circulated on political goals” regarding the oil scarcity and the expanding credit default swap.

The finance minister declared that Pakistan will “absolutely not” default on its debt obligations while speaking to a press conference via video link.

In December, the nation must make its next significant payment of $1 billion in international debts. Dar reassured the populace that this payment would be made on time.

“We have never before been in default. We won’t even be in danger of defaulting… Let me state unequivocally that the bond will be paid, that there will be no delay, and that arrangements have even been made in principal for future payments in the forthcoming year.

The economy of Pakistan is in disarray, and its foreign reserves are rapidly depleting. At $7.959 billion as of November 11, the central bank’s foreign exchange reserves are insufficient to cover imports for more than six weeks.

Reserves have been dropping despite the recent rollover of Chinese debt and fresh funding from the World Bank and ADB. Its external financial difficulties are growing as negotiations with the International Monetary Fund (IMF) regarding the ninth review of the loan facility come to a standstill. No firm monetary commitments have been made by friendly states. Remittances are the second-largest source of income after exports, but they are also in decline.

The global debt markets have been forced to view Pakistan’s bonds as hazardous and politically unstable sovereigns for months due to the country’s poor economic fundamentals and political unrest.

The former finance minister, Dr. Salman Shah, asserts that “political uncertainty has increased Pakistan’s concerns, which has increased debt insurance rates for the nation’s bonds.”

According to Shah, the market was waiting for the government to take some sort of action to change how overseas investors viewed Pakistani bonds. “First and foremost, the Army Chief should be selected as quickly and without controversy as possible. As a result, the nation’s political climate will improve, according to Shah.

Second, the Sukuk repayment of $1 billion, which is due on December 5, should be completed on time. Third, it was necessary to present an election schedule that was agreeable to all political parties. If these steps were taken, he predicted that the CDS would start to decline immediately.

If not, chaos would reign over the entire situation. He said that Pakistan wasn’t receiving much support from the IMF right now. “Given that Pakistan needs to find outside funding to meet its obligations under its foreign debt, the economy requires utmost focus. In order to properly implement the IMF’s programme, perform structural changes, especially in the energy sector, and improve the investment climate in the country, Dr. Shah stated.

The anticipated $1 billion Sukuk payment, which will boost market confidence, is a significant event, according to Fahad Rauf, head of research at Ismail Iqbal Securities.

“Pakistan is likely to continue participating in the IMF programme long after the current programme has ended, which will aid Pakistan in managing debt payments. However, significant measures are needed to lower the rising levels of debt in the economy, Rauf added, and these include: conserving energy, broadening the tax base, concentrating on exports, and luring foreign direct investment.

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