Pakistan’s default risk drops by 88%: report

• Improvement based on stabilizing macroeconomic indicators.
• The healthier external account also plays a role in growth.
• Miftah Ismail says “it’s great that the risk has gone down so much”.

KARACHI: Pakistan’s perceived default risk has come down sharply, as reflected by an 88% drop in five-year credit default swaps (CDS) to 1,493 basis points (bps) from their peak in November 2022, brokerage Topline Securities says .

He adds that the improvement is due to the stabilization of macroeconomic indicators and the healthier external account. Foreign reserves have risen to over $12 billion in December 2024, a significant recovery from the precarious low of $2.9 billion in February 2023.

But what does this mean for the country? Karim Punjani – former director of equities and treasury funds – said that Pakistan’s high CDS spreads are not an anomaly, adding that the COVID-19 pandemic has affected all economies and almost all countries’ CDS spreads have increased.

What is unique to Pakistan is the “political concerns” that further exacerbated the issue.

Former finance minister Miftah Ismail, whose second term was when Pakistan faced the risk of default, said “it’s great that the risk has come down so much. And I hope it stays down.”

He said a brief look at the overall trajectory of CDS spreads will help analyze what kind of policies the market requires.

Backing Punjani’s claims of political considerations, Ismail said the danger spiked in October 2022 at a time when he was forced to leave office. It was at the same time, he said, that the current deputy minister Ishaq Dar openly expressed his disagreements with the IMF.

“The risk eased in June/July 2023 when Pakistan finally struck a deal with the IMF. Then the risk eased further in January/February 2024 and has remained low since then,” he said, adding that the period reflected that Pakistan “will have an understanding with the IMF”.

In his post on X, Khurram Schehzad, adviser to the finance minister, said: “The reduction in country risk premiums provides a timely opportunity for Pakistan to plan and re-enter global capital markets, particularly with global interest rates on the decline. Borrowing costs and increased liquidity will contribute to further easing external pressures, thereby strengthening the country’s external position and enhancing its economic prospects.”

Punjani added that there is still room for improvement as CDS spreads have not yet reached pre-COVID levels. Then he said, it would be around “400-450bps”. For the current scenario, he said, “this means that while there are still some structural issues, the situation is not as bad as when the country was facing a political upheaval.”