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Is Pakistan on the verge of default?

A section of global and local experts and bond investors saw the rise in the CDS as a threat to their receivables…reports Asian Lite News

The perception of Pakistan’s risk of default has worsened with the five-year credit default swap (CDS) surging by 30 percentage points in a week to 93 per cent ahead of the repayment of $1 billion for a maturing international bond early next month.

According to a research house, the CDS had been at 4.2 per cent in January 2021, The Express Tribune reported.

Finance Minister Ishaq Dar and many financial experts have reiterated that Pakistan will not default on any of the international payments and that volatility in the CDS had nothing to do with the country’s default risk.

However, a section of global and local experts and bond investors saw the rise in the CDS as a threat to their receivables, The Express Tribune reported.

Yields (rate of return) on the $1 billion international bond (Sukuk), which is maturing on December 5, soared to 120 per cent on Monday from around 96 per cent on November 18, indicating the investors’ lack of confidence in Pakistan whether it would be able to repay the maturing debt.

The yield was hovering at less than 10% before the Covid-19 outbreak in February 2020 in Pakistan, when the investors had high confidence in Pakistan’s capacity to repay them.

The developments came amid a delay in the ninth review of Pakistan’s economy by the International Monetary Fund (IMF), which partly blocked the foreign currency flows into the country.

Accordingly, the foreign exchange reserves depleted to a critically low level of $8 billion against over $20 billion in August 2021, weakening the country’s capacity to make international payments, Express Tribune reported.

Arif Habib Limited Head of Research Tahir Abbas said that the “CDS is a premium that investors pay to insure their investment in bonds against the risk of default”.

“This, however, should not be taken as an indicator of the risk of default.”

Current account deficit narrows 68%

The State Bank of Pakistan (SBP) said the country’s current account deficit decreased 68 per cent in October from a year earlier owing to decline in imports.

In a statement on Monday, the SBP said the current account deficit was $0.57 billion in October compared with a deficit of $1.78 billion in the same month last year, reports Xinhua news agency.

During the first four months (July-October) of fiscal year 2022-2023, the current account deficit was $2.8 billion, down from $5.3 billion in the corresponding months of the last fiscal year, the figures showed.

Imports fell by $2.7 billion in the first four months of the current fiscal year, and exports increased by $0.2 billion compared to July-October of the previous fiscal year, said the statement.

As per the monetary policy, the bank expects the current account deficit to remain at 3 per cent of gross domestic product during the current fiscal year.

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