- Improvement based on the stabilization of macroeconomic indicators.
- A healthier external account also plays a role in development.
- Miftah Ismail says “it’s great that the risk has reduced so much.”
KARACHI: Pakistan’s perceived default risk has declined sharply, as evidenced by the 88% decline in its five-year credit default swap (CDS) spreads to 1,493 basis points (bps) since their peak in November 2022, according to brokerage firm Topline Securities.
He adds that this improvement is explained by the stabilization of macroeconomic indicators and by a healthier external account. Foreign exchange reserves reached over $12 billion in December 2024, a significant recovery from the precarious low of $2.9 billion reached in February 2023.
But what does this mean for the country? Former equity and treasury fund manager Karim Punjani said high CDS spreads in Pakistan are not an anomaly, adding that the COVID-19 pandemic has affected all economies and CDS spreads of almost every country soared.
What is unique to Pakistan is the “political concerns” that have further exacerbated the problem.
Former Finance Minister Miftah Ismail, whose second term came when Pakistan was grappling with default risk, said: “It’s great that the risk has reduced so much. And I hope that it will remain weak.
He said a quick look at the overall trajectory of CDS spreads will help analyze the type of policies the market demands.
Backing Punjani’s claims about his political concerns, Ismail said the risk increased in October 2022, when he was forced out of office. It was at the same time, he says, that current Deputy Minister Ishaq Dar openly expressed his disagreements with the IMF.
“The risk declined in June/July 2023 when Pakistan finally reached an agreement with the IMF. Then the risk further declined in January/February 2024 and has remained low since then,” he said, adding that this period reflected the fact that Pakistan “will have understanding”. with the IMF.
In his article on of global interest. Borrowing costs and increased liquidity will help further alleviate external pressures, thereby strengthening the country’s external position and improving its economic prospects.
Punjani added that there is still room for improvement as CDS spreads are yet to reach pre-COVID-19 levels. He then added that it would be around “400-450 basis points.” Regarding the current scenario, he said, “this means that although there are still structural problems, the situation is not as bad as it was when the country was facing political unrest.” .