Pakistan Default Risk Declines 88%: Report

KARACHI: The perceived risk of default in Pakistan has sharply declined. This is reflected by the 88% fall in its five-year credit default swap (CDS) spreads. The CDS spreads have decreased to 1,493 basis points (bps) since their peak in November 2022. This information was shared by brokerage firm Topline Securities.

It adds that the improvement comes on the back of stabilising macroeconomic indicators and a healthier external account. Foreign exchange reserves have risen to over $12 billion in December 2024, a significant recovery from the precarious low of $2.9 billion in February 2023.

But what does this mean for the country? Karim Punjani — ex equities and treasury fund manager — said that Pakistan’s high CDS spreads are not an anomaly, adding that the COVID-19 pandemic affected all economies, and the CDS spreads of almost all countries shot up.

What is unique for Pakistan is “political concerns” that further exacerbated the issue.

See Pakistan’s 5 Year CDS Spread Trend (2021-2024) here.

Also See: Pakistan Central Bank Cuts Key Rate by 200 bps, fifth in a row

CDS Spreads Decline

Former finance minister Miftah Ismail, whose second term in office was when Pakistan was battling with the risk of default, said that “it is great that the risk has come down so much. And I hope it stays down.”

He said that a cursory look at the overall trajectory of the CDS spreads would help analyze the market’s demands. This would provide insight into the types of policies needed.

Supporting Punjani’s claims of political concerns, Ismail said that the risk shot up in October 2022. This was when he was made to leave his office. It was the same time, he said, when now-deputy minister Ishaq Dar openly expressed his disagreements with the IMF.

“The risk decreased in June/July 2023 when Pakistan finally got an agreement with the IMF. Then the risk further declined in January/February 2024 and has stayed low since,” he said, adding that the period reflected that Pakistan “will have understanding with the IMF”.

In his post on X, Khurram Schehzad, adviser to the finance minister, said: “The decline in country risk premiums provides a timely opportunity for Pakistan to plan and re-enter global capital markets, particularly with global interest rates on the decline. Lower borrowing costs and increased liquidity will help alleviate external pressures further, thereby strengthening the country’s external position and boosting its economic prospects.”

Punjani added that there is still room for improvement since the CDS spreads have not yet reached pre-COVID levels. Then he said, it would be around “400-450bps”. On the current scenario, he said, “This means that there are still some structural issues. However, the situation is not as bad as it was when the country was facing political turmoil.”

This news is sourced from [Geo] and is for informational purposes only.