Pakistan’s default risk soars to 79 percent amid political uncertainty, delay in IMF talks

A man walks past the IMF Headquarters in Washington, US, on September 30, 2016. (AFP/File)

• Economists dismiss risk of immediate default, saying Pakistan can make payments against international sukuks in December
• Financial experts admit the country’s credit rating has gone down significantly since March due to political turmoil, instability

ISLAMABAD: Pakistan’s perceived risk of default has sharply risen to 79.33 percent, as per data circulated by an independent brokerage house, in the wake of the current political turmoil and uncertainty surrounding the ninth review of an International Monetary Fund (IMF) bailout package.
According to the statistics released by Arif Habib Limited on Thursday, the country’s five-year credit-default swaps (CDS) increased from 7,550 basis points (bps) on November 15 to 7,933 bps on November 16, constituting a single-day of increase of 383.8 bps.
The default risk perception stood at seven percent in March this year.
The CDS is a financial derivative that allows an investor to swap or offset credit risk with that of another investor. To swap the risk of default, the lender buys a CDS from another investor who agrees to reimburse them if the borrower defaults.
“Pakistan’s default risk is increasing due to multiple factors including a delay in the IMF ninth review, weak foreign exchange reserves and political turmoil,” Dr. Khaqan Hassan Najeeb, a former economic advisor to the government, told Arab News. “This is definitely a worrying sign for our economy.”
Najeeb informed the country needed at least $32 billion during this fiscal year to meet its foreign obligations and the government should secure the IMF review and required funds for the remaining fiscal year at the earliest “to give confidence to the market and stabilize the economy.”
Pakistan is currently in an IMF program and seeking further inflows to bolster its foreign currency reserves that have plunged to $7.959 billion as of November 17. The IMF staff mission is expected in Islamabad by the end of the month, but the date has not yet been finalized as the fund wants Pakistan to first make the required fiscal adjustments.
“The ongoing political uncertainty is also one of the reasons behind the day-to-day increase in the CDS as it shatters investor confidence in the market,” Najeeb said. “This all needs to be fixed to get the economy back on track.”
Pakistan’s finance ministry did not respond to Arab News queries till the filing of this report.
Ammar Khan, a senior economist, said the CDS would have no impact on the country’s economy in the short term since the total share of the Eurobond debt was around five to seven percent only.
Pakistan is scheduled to pay $1 million on December 5 against the maturity of the international sukuk, he continued, while another payment was due in April 2024.
“If our economy is bad today, it doesn’t mean it will remain so in the coming years as well,” he added.
Dr. Ashfaque Hasan Khan, senior economist and principal of School of Social Sciences and Humanities at NUST in Islamabad, said the CDS would come down sharply after the government paid $1 billion on December 5 against the sukuks.
“There is no immediate threat of default as the CDS is just a perception of the investors,” he told Arab News. “The CDS is just a speculation, and this [default] is not going to happen at least for now.”
Khan, however, admitted that Pakistan’s credit rating had gone down significantly since March due to political uncertainty and investors in the international market were not willing to buy Pakistani bonds.
“The political and economic risk is extreme at the moment which is reflected in Pakistan’s credit ratings,” he added. “If the official inaction with respect to economy continues, it will cost the country heavily in financial terms.”