Pakistan’s risk of default, indicated by credit default swaps (CDS), has decreased to a six-month low of 46.76% following the recent success of a $3 billion International Monetary Fund (IMF) deal. This positive shift is boosting global investors’ confidence and preparing the path for Islamabad to secure new debt financing through international bond markets soon. The government aims to raise $1.5 billion via Eurobonds or Sukuk issuance in the 2024 fiscal year.
Head of Research at Arif Habib Limited, Tahir Abbas, noted that the five-year CDS experienced a substantial reduction of 12.40 percentage points to 46.76% due to the unexpected accomplishment of the IMF deal. While this constitutes a remarkable recovery, it contrasts with the modest 2.75% recorded in March 2021 when foreign exchange reserves were robust.
Despite the reduced default risk, the Pakistani currency could not maintain its gains against the US dollar due to the high demand for foreign currency to settle import backlogs and payments under the IMF program.
Read: Pakistan and IMF Agree on $3 Billion Stand-By Arrangement
Pakistan’s 10-year Eurobond, maturing in April 2024, regained 55% in value, indicating easing concerns about Pakistan’s economy among global investors. However, the country’s junk-level credit rating and the global interest rate situation will impact the timing of returning to international bond markets for new funds.
Abbas expects the forthcoming approval of the $3 billion IMF program and capital inflows from global creditors and friendly countries, amounting to around $3-4 billion throughout FY24, to stabilize the rupee in the short term further.
