Pakistan’s chances of defaulting on its debt have reached alarming newlevels, with the cost of ‘insuring’ the country’s sovereign debt hittinganother all-time high in devastating fashion.
According to data by Arif Habib Limited (AHL), Pakistan’s benchmark 5-yearCredit Default Swap (CDS) spiked on 18 November by a whopping 1,253 basispoints to 92.53 percent. The instrument has widened by over 12.53percentage points in a single day and shows that investors are not willingto take on Pakistan’s default risk at a price level inferior to 92 percent.
The spike coincides with the State Bank of Pakistan’s (SBP) decliningforeign exchange reserves, which remained less than $8 billion as ofNovember 11, 2022, according to data released last week.
Dar on Saturday dispelled rumors of an impending default, stating thatPakistan would not seek an extension in the payment of a $1 billion Sukukbond due in December. He asserted that Pakistan never defaulted even on asmall amount except in 1971, and the upcoming bond will be paid in fullwithout any delays.
He also lambasted his political adversaries for allegedly twistingPakistan’s perceived default risk indicator. He said the rumors about theCDS were spread on a political basis and should be overlooked for the sakeof the country. While the minister claimed that the marker was meaninglessand that international bonds are a very small instrument, money markets aretaking it the other way around.
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Pertinently, 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. Both cited liquidity risks in theaftermath of devastating floods as a major reason for their downgrades,while also mentioning depleting reserves.
The ongoing bond market reaction has heightened fears of a default,compounded by recent floods estimated to cost over $30 billion in damages.For a nation that has not even defaulted yet, the maddening uncertainty inits external liquidity and funding conditions isn’t helping.
