Risk of default rises as bond yields spike

US dollar-denominated bonds climbed 73bps to 106.37% in global markets

Salman Siddiqui May 16, 2023
photo: file


The yield on Pakistan’s US dollar-denominated bond experienced a significant surge, climbing 73 basis points to 106.37% in the international market on Monday. This spike suggests an elevated risk of default on foreign debt repayment for the country.

The increase in bond yields reflects the return of volatility in Pakistan’s global bond market. Uncertainty looms over whether Islamabad will succeed in reviving the International Monetary Fund (IMF)’s $6.7 billion loan programme and meet international payment obligations beyond June 2023.

The yield on the 10-year Pakistan Government International Bond, valued at $1 billion and maturing on April 15, 2024, has seen a cumulative increase of 30.60 percentage points in the past five months.

Similarly, the yields on six other Pakistani global bonds, maturing at different times until April 2051, also experienced surges ranging from 10 to 39 basis points. One bond, maturing in January 2029, saw a recovery of six basis points.

Prior to the outbreak of COVID-19 in Pakistan in February 2020, bond yields were around 8%-10%.

Finance Minister Ishaq Dar’s assurance last week that Pakistan had made arrangements to repay foreign debt worth $3.7 billion until the end of June 2023 did not alleviate concerns. Moody’s Investors Service raised the alarm, stating that Pakistan could default without the IMF loan programme after June 2023, given its weak reserves.

“Pakistan’s financing options beyond June are highly uncertain. Without an IMF programme, Pakistan could default given its very weak reserves (at $4.4 billion at present).” Speaking to the Express Tribune, Pak-Kuwait Investment Company (PKIC), Head of Research, Samiullah Tariq attributed the surge in bond yields to uncertainty surrounding the IMF programme and the tight liquidity position in the international market. The rise in interest rates on banks’ financing in the US, Europe, and other regions reduced liquidity supply and impacted bond yields in emerging markets, including Pakistan.

Read US default a concern for global economy

Tariq highlighted that the yield on Pakistan’s $1 billion bond maturing in April 2024 had hit an all-time high of approximately 110-115% recently but had since decreased due to improved US dollar inflows. Workers’ remittances surpassed the trade deficit in March and April, contributing to a surplus in the balance of the current account.

However, the uncertainty surrounding the revival of the IMF loan programme has once again raised questions about Pakistan’s ability to repay loans after June 2023, causing an impact on bond yields. Out of the total $25 billion in external loans to be repaid next year, Tariq noted that around $15 billion were expected to be rolled over by friendly countries such as China, Saudi Arabia, and the UAE.

The stalled IMF loan programme is set to conclude on June 30, 2023. However, Pakistan will still need to secure a new and larger IMF loan programme in the next fiscal year to resume imports and repay outstanding foreign debt. During the Geneva conference on flood relief in January 2023, the international community pledged around $9 billion in foreign financing to Pakistan. Financial institutions like the World Bank, Asian Development Bank (ADB), and friendly countries await the IMF’s approval.

The IMF has conditioned the revival of the program on Pakistan acquiring new financial commitments worth $6-7 billion before June 30. So far, Pakistan has secured commitments of $2 billion from Saudi Arabia and $1 billion from the UAE.

Published in The Express Tribune, May 16th, 2023.

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