Credit default swap climbs to 92.53% on political unrest

KARACHI: The cost of insuring Pakistan’s five-year sovereign debt exposure rose 1,224 basis points over the weekend to an all-time high of 92.53%, according to local brokerage data Monday.

The rate at these levels reflects some default. Analysts said the country’s sovereign dollar bonds would remain vulnerable until the political standoff between the government and former Prime Minister Imran Khan’s main opposition party is resolved.

“The situation on the ground is difficult but not as severe as reflected in the current credit default swap (CDS) rate,” one analyst said. “The margin for any mishap was slim, that’s for sure.”

Pakistan’s economy is in turmoil and its foreign exchange reserves are rapidly depleting. The central bank’s foreign exchange reserves stood at $7.959 billion as of November 11 and are sufficient for less than six weeks of imports.

Despite the recent renewal of Chinese debt and new injections from the World Bank and AfDB, reserves have declined. As talks with the International Monetary Fund (IMF) on the ninth review of the lending facility reach an impasse, its external financial tensions are growing. Friendly nations have made no specific funding pledges. After exports, remittances are the second largest source of income, but these are also declining.

Along with deteriorating economic fundamentals, Pakistan’s political instability has forced foreign debt markets to view its bonds as risky and politically unstable sovereign bonds for months.

According to Dr. Salman Shah, the former finance minister, “it was political instability that heightened concerns for Pakistan and, in turn, increased debt insurance premiums for the country’s bonds. “.

Shah said the market is waiting for the government to take action to change the way foreign investors view Pakistani bonds. “First and foremost, the army chief should be appointed as soon as possible and without controversy. This will make the political environment in the country more stable,” Shah said.

Second, the repayment of $1 billion on Sukuk due on December 5 should be made on time. Third, an election roadmap acceptable to all political parties should be announced. The CDS would start to fall right away if these actions passed, he said.

Otherwise, everything would spiral out of control. The IMF does not currently provide significant support to Pakistan, he added. “As Pakistan needs to secure external financing to pay its external debt obligations, the economy demands full attention. Therefore, there is a need to implement the IMF program in letter and spirit, carry out structural reforms, especially in the energy sector, and improve the investment climate in the country. said Dr. Shah.

Fahad Rauf, head of research at Ismail Iqbal Securities, said an important event would be the next $1 billion payout on Sukuk, which would give the market confidence.

“Pakistan is likely to remain in the IMF program even after the current program ends, which would help Pakistan manage its debt payments. However, serious reforms are needed to reduce the growing debt levels of the economy, i.e. i) conserve energy, ii) increase the tax base, iii) focus on exports and iv) attract FDI,” Rauf said.

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