Pakistan’s five-year CDS falls sharply as nerves subside

KARACHI: The cost of insuring the bonds of Pakistan’s sovereign debt fell sharply on Wednesday from the previous day's close as some political concerns subsided after the prime minister’s office received a list of six senior generals to appoint army chief.

Along with the deteriorating economic fundamentals, the country’s political instability forced the foreign debt markets to see its bonds as risky and politically unstable sovereigns for months. Five-year CDS stood at 71.64 percent (fell 5,224 basis points) on Tuesday - down from a close of 123 percent on Monday, a brokerage data showed. CDS, which is a measure of the country’s default risk, was around 52 percent at the beginning of this month. “I think the rate [CDS] has come down because it went very high, which was absurd,” said Samiullah Tariq, head of research at Pak-Kuwait Investment Company.

Analysts said CDS is an illiquid instrument and that’s why price volatility is blown out of proportions.

“CDS for Pakistan is illiquid and not a true representation of country risk. Better to look at dollar bond yields,” said Mohammed Sohail, CEO at Topline Securities.

The likelihood that the nation will not fulfill its responsibility was not too high to cause concern, according to analysts.

As determined by the chance of default, the country’s credit default risk was only about 10 percent. The probability of default differs greatly from purchasing insurance on an asset to protect repayments, which is dependent on investors, and CDS is insurance. The country is facing a balance of payments crisis, and the foreign reserves are quickly running out. The central bank has near $8 billion foreign reserves as of November 11, which are enough for less than six weeks' worth of imports. Despite the recent rollover of Chinese debt and fresh infusions from the World Bank and ADB, the reserves have been on a downward trend. As talks with the IMF over the ninth review of the loan facility come to a stalemate, its external financial strains are increasing. Friendly nations have not made any definite funding pledges. After exports, remittances are the second-largest source of income but are declining.

Former finance minister Shaukat Tarin, at an event on Tuesday, said if the government wanted to alter how foreign investors perceive the country, it should show a balance of inflows and outflows so that the situation could become clear and default fears were reduced. The markets want to know how the government's cash flows are actually doing, and how the government plans to balance inflows and outflows.

“The markets will stabilise if the government gives them a cause for confidence by disclosing its cash flow status. This will help in easing the country’s default concerns among Pakistan’s sovereign dollar bonds holders,” he said.