Default risk falls sharply

Drop came after reports IMF will revive $7b loan programme before weekend

Salman Siddiqui August 12, 2022
Experts said the benchmark five-year credit default swap was still high at 17.44% compared to the range of 4-6% during the days of economic stability. PHOTO: FILE


Pakistan’s risk of default on international payments, measured by the credit default swap (CDS), sharply reduced to half in a single day to 17.44% on Thursday after the government reported that the IMF was set to confirm the revival of its $7 billion loan programme before weekend.

The development triggered a significant drop in yields on Pakistan’s global bonds and supported the rupee that recovered to more than a three-week high at Rs218.88 against the US dollar in the inter-bank market.

Finance Minister Miftah Ismail confirmed on Wednesday the International Monetary Fund (IMF) was expected to send the Letter of Intent (LoI) for the revival of its loan programme within 24 hours.

LoI is a document that lists the conditions the government has agreed to fulfill under the IMF programme. The finance minister and State Bank of Pakistan (SBP) governor will sign the document.

Earlier, Pakistan struck a staff-level agreement in July. The IMF executive board is scheduled to meet on August 24 to approve the release of the next tranche of $1.2 billion for Pakistan.

Ismail has claimed time and again over the past one week that Pakistan has successfully mitigated the risk of default on import payments and foreign debt repayments like the one Sri Lanka encountered in the recent past.

The “macroeconomic stability is forthcoming with the IMF programme resuming before the end of August as all conditions have been met. Furthermore, the balance of payments position is now well under control,” he was quoted as saying at a meeting with corporate leaders in Karachi on Friday (August 5).

“The fall of default risk (CDS) and international bond yields and the rise of rupee (against the greenback) has reopened the path for Pakistan to issue new bonds (Eurobond and Sukuk) worth around $1-2 billion in international markets,” Pak-Kuwait Investment Company Head of Research Samiullah Tariq said while talking to The Express Tribune.

“The most likely return of stability on the indicators (especially on international bond yields) may convince the government to issue the global bonds in near future.”

Although the government has fully arranged the required foreign financing estimated at $32.2 billion for the current fiscal year 2023. However, the issuance of the bond at lower yields (rate of return) would help rebuild the country’s foreign exchange reserves which have critically fallen to just over one-month import cover at $7.83 billion in the week ended on August 5, 2022.

Experts said the benchmark five-year credit default swap (CDS) is still hovering high at 17.44% compared to in the range of 4-6% during the days of economic stability in the country.

“The default risk has significantly cut down after the government aggressively reduced imports to less than $5 billion in July and announced they (imports) would be maintained on the lower side over the next three to four-month,” KASB Securities Head of Research Yousuf Rahman said. 

Besides, IMF acknowledgment Pakistan has fulfilled all the prerequisite conditions for the resumption of its loan programme and expected unlocking of foreign financing from other multilateral and bilateral creditors and friendly countries from late August has “dismissed the concern of default,” he said.

“The developments are expected to support the domestic currency recovering to around Rs200 against US dollar over the next two to three-month.

Default risk

To recall, Pakistan’s benchmark five-year credit default swap (CDS) hit an all-time high of 34.86% in recent days. It is down by 17.42 percentage points since 17.44% on Thursday, Arif Habib Limited reported.

The CDS was hovering around 5% before the political uncertainty resurfaced amid the ouster of PTI-government in April 2022. The political instability led to an economic meltdown and spiked CDS to its peak a few days ago in the ongoing month of August 2022.

Bond yields

The yield on five-year Third Pakistan International Sukuk – worth $1 billion maturing on December 5, 2022 – dropped 24 basis points on a day-to-day basis to 21.5% on Thursday.  But the yield has cumulatively reduced by a massive 28.25 percentage points to date since it hit a peak of 49.75% in the recent past.

The yield on the 10-year Pakistan Government International Bond – worth $1 billion maturing on April 15, 2024 – shrank by a cumulative 14.28 percentage points to 32.2% since its peak.

Yields on other global bonds dropped in the range of 3.42-9.50 percentage points since their peak.

Rupee gains

The domestic currency has made a fresh recovery of 1.38% (or Rs3.03) on a day-to-day basis to a 24-day high at Rs218.88 against the greenback on Thursday.

With this, it has cumulatively regained 8.77% (or Rs21.06) in the past eight consecutive working days.

The currency has maintained an uptrend in the wake of an increase in supply of foreign currency from exporters and a drop in demand from imports in the market.­­

Published in The Express Tribune, August 12th, 2022.

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