Despite assurances, bond investors still jittery

Pakistan’s default risk worsens to record high at 123% in global market

Salman Siddiqui November 23, 2022
A stockbroker during a trading session at the Pakistan Stock Exchange in Karachi. PHOTO: AFP


Pakistan’s repeated assurances that it will repay the $1 billion maturing Sukuk on time in December this year have failed to win the confidence of global bond investors as the country’s default risk, measured through the five-year credit default swap (CDS), worsened to a record high at 123%.

CDS spiked 29 percentage points to 123% on Tuesday compared to 96% on Monday. It had hovered around 4.2% in January 2021, according to a local research house.

Yield (rate of return) on the Sukuk maturing on December 5, 2022 soared to 145.44% in the global debt market compared to 105.74% a day ago. The yield had been standing below 10% before the Covid-19 pandemic outbreak in Pakistan in February 2020.

KASB Securities Head of Research Yousuf Rahman said that bond prices suggested that international investors believed that the government of Pakistan would be able to repay the $1 billion Sukuk on time in December.

The Sukuk price has recovered close to its actual value of $1 each. However, the prices of 2024 and 2025 bonds were hovering at less than half a dollar each, he said.

“Volatility in the five-year CDS indicates the global investors are fearful Pakistan will default on one of the two international bonds worth a total of $2 billion in 2024 and 2025,” he said. Low foreign currency inflows in recent days compared to the repayment of heavy foreign debt over the next two years have made the global investors anxious about their receivables, Rahman pointed out.

“Pakistan is to repay $20-21 billion in foreign debt in the current fiscal year and another $25-26 billion in FY24,” he said.

On the contrary, the inflows on account of export earnings and workers’ remittances have started shrinking while the multilateral and bilateral creditors are waiting for the International Monetary Fund’s (IMF) nod for the ninth review of its loan programme before the release of scheduled financing.

“Yes, Pakistan is under an IMF loan programme. Countries that are under the global lender’s programmes usually do not default. The programme, however, is ending in June 2023,” Rahman said.

“What will happen after June 2023 is the main concern of the investors and that’s why they think Pakistan may default on the bonds that will mature in 2024 and 2025.”

Rahman emphasised that Pakistan had to undertake the overdue structural reforms to fix the faltering economy, particularly the external economy. “It has to diversify its export products and markets to ramp up sales abroad and work on import substitution to permanently reduce foreign expenditure.” Pakistan should create an investment climate that could restore the confidence of investors and attract foreign investment in export sectors, he suggested, adding that it should also stabilise the rupee-dollar exchange rate and remove political uncertainty to re-emerge on the world economic map.

“Pakistan cannot come out of the current and the recurring financial crisis without controlling the twin fiscal and current account deficits. Improvement in the country’s income is the only way through which investors’ confidence can be won.”

Rupee up

A reduction in the current account deficit, due to low imports in October 2022, helped the rupee to recover 0.11% (or Rs0.24) to Rs223.42 against the US dollar in the inter-bank market on Tuesday. With that, a seven-day losing streak came to an end.

The rupee cumulatively dropped by 1% (or Rs2.24) in the seven days till Monday. Rahman was of the view that the rupee may come under pressure with the government’s plan to gradually relax the import curbs to spur economic activities. “The rupee may depreciate to Rs250 to a dollar by the end of current fiscal year on June 30, 2023,” he projected.


Published in The Express Tribune, November 23rd, 2022.

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