Pakistan’s default risk entered alarming new levels this week as the costof ‘insuring’ the country’s sovereign debt shot up, scaring away investors.
According to data by Arif Habib Limited (AHL), Pakistan’s benchmark 5-yearCredit Default Swap (CDS) spiked on 11 November by 394 basis points to64.19 percent. The instrument has widened by over 4,200 basis points or4.21 percent in a month, indicating that foreign investors are losing faithin Pakistan’s dollar-denominated maturities.
Last month, Fitch downgraded Pakistan’s long-term issuer default rating toCCC+ from B-, while Moody’s downgraded the country’s issuer and seniorunsecured debt ratings to Caa1 from B3. Yields have spiraled down eversince and will only get worse if there’s no strategy in place to win backinvestor confidence. Commenting in this regard, independent economicanalyst A H H Soomro said,
For non-finance people, simply speaking, the risk of a credit default –Pakistan’s ability to borrow and repay – is increasing. Investors areskeptical to lend to Pakistan given its poor track record, absence ofstructural reforms & now, the political uncertainty. New projects will bedelayed or abandoned. Forex controls will be placed. Dollar will be a rarecommodity and available only when absolutely necessary. Foreign investorswill worry about dividend repatriation. The Richie Rich will not takeadditional risks, hence no new jobs.
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He said the problem is homegrown and the solution is political willpower.“There are other ways to effect change. Ask for an early election and beingready for electoral reforms than agitations to repeat Sri Lanka-esqueregime change effecting an economic default,” he added.
The country’s ongoing problems are compounded by recent floods estimated tocost over $30 billion in damages, and the spiraling uncertainty in itsexternal liquidity conditions isn’t helping. “World Bank and ADB are backto lending spree as UAE, KSA & China extend debt relief. However, it isonly a temporary breather,” stated Soomro.