Islamabad, Dec 22: Pakistan’s risk of defaulting on its debt has significantly decreased, with the cost of insuring the country’s sovereign debt measured by its 5-Year Credit Default Swap (CDS) dropping by 88% from its peak in November 2022. This decline reflects improving macroeconomic stability, enhanced external accounts, and a stable PKR/USD exchange rate, which has hovered around 277-278 for most of 2024.
Key Factors Behind the Decline in Default Risk:
- Improved Foreign Exchange Reserves:
Pakistan’s liquid foreign exchange reserves rose from $2.9 billion in February 2023 to over $12 billion in December 2024, alleviating concerns about its ability to meet external debt obligations. - Stable Macroeconomic Indicators:
A more stable exchange rate and lower currency volatility have created favorable conditions for debt refinancing and repayment. - Favorable Bond Yields:
The yield on Pakistan’s five-year international bond maturing in 2026 has decreased by 1,215 basis points, while the 10-year bond yield has dropped by 574 basis points, signaling improved investor confidence. - Monetary Policy Easing:
Borrowers in emerging markets like Pakistan are benefiting from easing monetary policies, which reduce borrowing costs and make debt servicing more manageable.
Challenges and Outlook:
Despite these improvements, challenges remain:
- Political Instability:
Continued political uncertainty may deter some creditors from fulfilling their financing commitments. - Speculative Credit Rating:
Pakistan’s credit ratings (Caa2 by Moody’s and CCC+ by S&P) remain in speculative or “junk” territory, reflecting ongoing fiscal and economic vulnerabilities. - Structural Reforms Needed:
A strong economic and fiscal turnaround is essential to sustain the current momentum and build long-term financial stability.
Future Prospects:
The improving current account balance, reported at a surplus of $729 million, and declining inflation rates offer optimism for the coming months. If these trends continue and creditors resume financing commitments, Pakistan’s economic stability and default risk could improve further, fostering a more harmonious financial environment.
The path forward requires consistent policy measures, structural reforms, and a commitment to economic discipline to solidify the gains and attract sustained investor confidence.
