The Global Sovereign Credit Risk Report for the second quarter of 2010 has ranked Pakistan’s sovereign debt the fourth most risky in the world.
The report issued by CMA stated that the riskiness of debt owed by the Government of Pakistan has marginally reduced since last quarter when the country was ranked third on the list of world’s riskiest sovereign debtors.
The risk premium on debt issued by the government stands at 719 basis points. The country’s sovereign debt currently holds a ‘B’ rating, an improvement from last quarter’s rating of ‘B minus’. Pakistan’s sovereign debt is still considerably riskier than all other Asian countries, despite dropping 131 basis points since hitting the peak of 850 basis points on April 27.
Pakistan is ranked ahead of Venezuela, Greece and Argentina which are the riskiest sovereign debtors of the outgoing quarter.
Commenting on the drop in risk associated with Pakistan’s debt, economist Asad Farid said “improvements in the external account, increase in foreign exchange reserves and a stable currency have helped the credit rating.” Farid commented that “reserves are currently around $15 billion so chances of sovereign default are minimal.”
CEO Topline Securities Mohammad Sohail added “thanks to the International Monetary Fund, Pakistan’s foreign exchange reserves are now worth more than five months of imports. Investors are viewing this as a positive sign. Political and security situation in the country has also been improving gradually over the past few months helping to bring down risk premium associated with the country’s sovereign debt.”
According to the report, Norway has maintained its title as the safest government to lend to. Its risk premium stands at 26.7 basis points. Iceland, Dominican Republic and Egypt have shown the most improvement in terms of reduction in risk premium on sovereign debt since last quarter.
On the flip side, Greece, Belgium, Spain and Portugal have posted the worst quarterly performances. The report cited that “towards the end of the quarter Greece temporarily overtook Venezuela as the sovereign with the highest default probability and has been the worst performer this quarter, globally.”
Risk premium on sovereign debt issued by Greece has increased by 190 per cent to reach 1,003.4 basis points.
The report also highlighted that “all of the worst performers have come from Western Europe this quarter, with protection costs for the poorest performers more than doubling,” adding “major widening action in European sovereign credits indicates that the eurozone remains the hub and focus of the global debt crisis, none of the Western European Sovereign CDS (credit default swaps) have tightened this quarter”.
Analysts said Pakistan is unlikely to face major problems due to the worsening economic situation of Western European states. Mohammad Sohail commented “the country is not heavily dependent on exports. Most of our international trade is with the US and China so we should remain fairly insulated from the crisis unfolding in countries like Greece and Belgium.”
CMA is a wholly-owned subsidiary of CME Group, the world’s largest derivatives exchange. CME is considered one of the leading sources of independent data on credit markets.
Published in The Express Tribune, July 6th, 2010.
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