KARACHI: Pakistan’s ability to meet its bond obligations, to insure the country’s sovereign debt against default, comes after a rating downgrade and growing concerns among international investors about debt restructuring. Costs hit a 13-year high.
Pakistan’s benchmark five-year credit default swap (CDS) hit its highest level since November 2009 as it rose by 3,071 basis points on a daily basis on Monday, according to data released by Arif Habib. It has become 52.8 percent.
Yields on Pakistan’s dollar-denominated bonds continued to rise, reflecting investor concerns that the nation could miss its $1 billion payment to credit holders as the sukuk matures on December 5, 2022.
Explaining the reasons behind the rise in CDS and bond yields, a former central bank governor, who did not want to be named, said several factors were responsible.
“The country is facing a serious balance of payments situation with State Bank of Pakistan’s reserves covering less than a month’s worth of imports. In addition, there is not only economic ‘uncertainty’ but domestic instability and There is also certainty, which the capital markets do not like,” he said.
Other factors include recent downgrades by Moody’s and Fitch, global interest rate hikes, particularly the Federal Reserve strengthening the US dollar and weakening the rupee, and overall geopolitical turmoil and supply chain disruptions. are affecting the commodity futures market and putting further pressure. On our import bill.
“Put it all together and you have a can of worms that we are facing right now that raises the specter of a possible default…which I personally believe will not happen,” he said. added.
On the government’s repurchase of sovereign bonds, he said: “I doubt it will happen because I don’t believe we have the resources to match our reserves with the sub-investment grade debt that the FX If there is liquidity, it would be wise to use it.”
He said that managing reserves in this way is not a good idea. “Not a good idea for reserve management. Buying at a deep discount is risk-free unless you are sure of future FX inflows that will strengthen reserves,” he noted.
The yield on the five-year third Pakistan International Sukuk Company Limited rose 75bps to 139.74% on Tuesday.
On the 10-year Eurobond maturing on April 15, 2024, the yield rose to 92.93 percent from 89.58 percent. The yield on the 10-year Eurobond maturing on September 30, 2025 rose to 59.07 percent from 57.63 percent.
Fahad Rauf, head of research at Ismail Iqbal Securities, believes that if Pakistan manages to pay off the upcoming maturities easily, it will give some confidence to the market.
“Furthermore, if China and Saudis offer some additional funds/rollover, that will also help improve sentiment,” Rauf said.
According to analysts, Pakistan owes 42 percent of its debt to multilateral sources, 40 percent to bilateral lenders, 7 percent to the global bond market and 7 percent to commercial banks.
Pakistan’s Finance Minister Ishaq Dar has on several occasions ruled out the possibility of the country defaulting on its debt and extending the maturity date of bonds due in December. He has assured of the country’s commitment to meet all its bond obligations on time.
According to reports, the government will try to restructure the non-Paris Club debt worth $27 billion.
As part of its overall strategy to raise $34 billion in the current fiscal year to meet its debt and foreign trade-related obligations, Pakistan has asked China to waive its $6.3 billion debt. Ley which is going to mature in the next eight months. Flood-related funds approved by multilateral lenders are expected to flow into the country soon.
The ninth review of the International Monetary Fund’s Extended Fund Facility is expected in November, the successful completion of which will pave the way for further disbursements from the Fund.
The IMF and the Ministry of Finance have estimated Pakistan’s total external financing needs to be between $32 billion and $34 billion for the current fiscal year.
As of October 14, foreign exchange reserves held by the State Bank stood at $7.59 billion.
Last week, global rating agency Fitch downgraded Pakistan’s sovereign credit rating by one notch from ‘B-‘ to ‘CCC+’, citing further deterioration in the country’s external liquidity and funding conditions and dwindling foreign exchange reserves. done. The downgrade comes three months after Fitch downgraded the country’s outlook from “stable” to “negative” and revised the rating to B-.
