Pakistan is Now 88% Less Likely to Default on its Debt But Issues Remain

Pakistan’s chances of defaulting on its debt have fallen far below the point where panic is bliss, with the cost of ‘insuring’ the country’s sovereign debt now down by 88 percent compared to the alarming level seen in November over two years ago. The country was 93 percent likely to declare bankruptcy in November 2022. A Karachi-based investment analyst told ProPakistani, “For Pakistan, debt markets are indicating an improved reconciliation between emerging market (EM) corporate borrowers and their sovereign counterparts, as concerns subside about the country’s ability to refinance at competitive rates. However, several creditors still have yet to fulfill their financing commitments due to the political mayhem running riot in the background”. He explained that on the issuer (Pakistan) side, EM borrowers like Pakistan now have the option to take advantage of their central bank’s easing monetary policy and also from the decreasing currency volatility. As of Friday, December 20, 2024, the PKR/$ interbank rate has remained stable at 277-278 for the majority of the current calendar year. The South Asian nation’s historically harrowing default risk, gauged by one of the parameters, 5-Year Credit Default Swap (CDS), has plummeted by 88 percent from its peak in November 2022, amidst stable macros, and improved external accounts, Topline said in a short statement today. This comes as liquid FX reserves recently crossed US$ 12 billion in December 2024 from a low of US$ 2.9 billion in February 2023. On a calendar year-to-date (CYTD) basis, the yield on the five-year Pakistan Government International Bond maturing on 8 April 2026 is down by 1,215 basis points to 10.76 percent. The yield on the 10-year international bond maturing on April 8, 2031, decreased by 574bps to 10.96 percent. The prevalent lowering risk of default also ends further worries of any economic sanctions by creditors. Pertinently, Pakistan’s credit rating is currently Caa2 (Moody’s) / CCC+ (S&P), which is considered to be a speculative or “junk” grade by most commentators in the market. Despite all of this, an exceptionally strong economic and fiscal turnaround is the need of the hour, with the country reporting an improved current account surplus of $0.729 billion amid various trade metrics supporting the economy. This positive may perhaps pivot to better highs as inflation continues to subside and creditors start fulfilling their financing obligations in the months to come. Will Pakistan’s default risk further decrease and bring harmony to the economy? Let us know in the comments below.