Pakistan’s perceived risk of default, as determined by the 5-year Credit Default Swap (CDS), has significantly increased over the past month, peaking at 64.19% on November 11.
Pakistan’s 5-Year CDS increased by 4,210bps in one month, from 2,208bps in October to 6,419bps in November, according to data provided by brokerage house Arif Habib Limited (AHL) on Monday.
A credit default swap (CDS) is a type of financial derivative that enables one investor to exchange or counterbalance their credit risk with another investment. The lender purchases a CDS from another investor who agrees to pay them back if the borrower defaults in order to swap the default risk.
Pakistan 5-Year CDS increased by 4,210bps to 6,419bps in last one month. @GovtofPakistan @FinMinistryPak#Pakistan #Economy #AHL pic.twitter.com/cftYhZqgHN
— Arif Habib Limited (@ArifHabibLtd) November 14, 2022
“Pakistan’s debt insurance cost is increasing, which means that the country’s default perception is rising,” said an analyst on condition of anonymity.
“This means that the credit market has become more inaccessible for Pakistan and getting commercial loans from banks or through Euro bonds would become very difficult.”
The country had $126.07 billion in total external debt and liabilities as of May 31, 2022, of which $85.64 billion was public external debt.
“The increase in CDS is driven by ongoing political instability in the country. Moreover, the decline in foreign exchange reserves and remittances and the country’s inability to secure funding in the wake of recent floods is driving the perception,” said the analyst.
The State Bank of Pakistan’s (SBP) foreign exchange reserves fell $956 million weekly as of November 4, 2022, according to the most recent data available, falling to $7.96 billion. The country’s total liquid foreign reserves were at $13.72 billion. The total amount of net foreign reserves held by commercial banks was $5.76 billion.
Pakistans Credit Default Swap (CDS) has topped 64%. International market pricing in the highest default risk. This is contrary to what initially Miftah and later Ishaq Dar have been saying. When @shaukat_tarin was FM in March the CDS were at only 5% compared to 64%,Reality check pic.twitter.com/TAV1DmQrlD
— Muzzammil Aslam (@MuzzammilAslam3) November 14, 2022
Moreover, the amount of remittances arriving in Pakistan decreased by almost 16% in October 2022 when compared to the same month the previous year to $2.215 billion due to the impact of unofficial and illegal channels for money transfer as well as a global economic slowdown that made the problem worse.
The government must take tough action, according to the market expert, to stop the flow of foreign currency and strengthen its position in the foreign exchange market.
Ishaq Dar, the federal minister of finance and revenue, claimed last week that the government had obtained financial commitments from allies totaling between $13 billion and $14 billion to meet Pakistan’s financing requirements.
