KARACHI: Financial analysts and experts on Tuesday downplayed historic growth of Pakistani five-year bond’s credit default swap (CDS) to 123 percent, saying the country’s chances of a default were only 10 percent. 

CDS is a financial derivative which serves as a form of insurance against default and lets an investor offset their credit risk with that of another investor. To swap the risk of default, the lender buys a CDS from another investor, who agrees to reimburse them the amount in case the borrower defaults.  

Pakistan’s CDS has been continuously rising in recent days, mainly due to lower foreign exchange reserves and the political turmoil in the South Asian country, since the ouster of former prime minister Imran Khan through a parliamentary no-trust vote in April. The CDS, which was recorded at 93 percent on Monday, surged to 123 percent on Tuesday, according to different brokerage houses.   

The higher CDS rate is being equated with the country’s default on payments of its five-year bonds, including $1 billion of the Third Pakistan International Sukuk bonds maturing on December 05, $1 billion of the Pakistan Government International Bond maturing in 2024, and $500 million of the Pakistan Government International Bond maturing in 2025.   

But Pakistani financial experts said the hike in CDS, an illiquid instrument, did not mean that Pakistan was defaulting.   

“The uncertainty surrounding the IMF (International Monetary Fund) and other inflows has probably caused a spike in CDS, but it doesn't mean that Pakistan is defaulting,” Dr Khaqan Najeeb, a former advisor to the Pakistani finance ministry, told Arab News. 

“It is important to understand that CDS is an illiquid and a thinly traded instrument. It is more susceptible to movement. Many fund managers don't follow CDS. It is more of an indicative value.”  

Pakistani financial managers, who said they didn’t trust CDS, were confident that the country would not default at least in the next six months.   

“Frankly speaking, I have no confidence in CDS because of the quality of the data,” Muhammad Sohail, CEO of the Karachi-based Topline Securities brokerage firm, told Arab News. 

“It is an OTC (over-the-counter) instrument, [which] means it is not the exchange rate and it is like a commodity that has different rates in different markets... and it is not trading.”  

Sohail said Pakistan could “default or reschedule its debts but after a year only, if the economic conditions of the country do not improve.”   

Tahir Abbas, a research head at the Arif Habib Limited brokerage house, also believed that CDS was not a true measure of the country’s default risks.  

“CDS is very much illiquid, not easily available, and there is a huge difference in buying and selling rates,” he said.  

“Looking at CDS and jumping to the conclusion that Pakistan is going to default or has defaulted is absolutely wrong.”  

Khurram Schehzad, CEO of the Alpha Beta Core financial advisory firm, said the country’s probability to default was only 10 percent as compared to the current hype.  

“Pakistan's credit default risk, measured appropriately by probability of default, is only around 10 percent,” Schehzad said, citing data from Bloomberg Economics.   

“CDS is an insurance and there is a lot of difference between probability of default and buying insurance on an asset to protect repayments, which depends on investors.”   

Topline Securities CEO Sohail believed that the bond yield was an accurate gauge to assess a country's probability to default on sovereign debts.   

“If we have to measure the risk of Pakistan being default, then we should look at the bond yield which are also on higher side,” he told Arab News. 

"Instead of commenting on CDS it is better to comment on Pakistan’s higher bond yields." 

The yield of Third Pakistan International Sukuk surged to 145.4 percent from 105.7 percent on Tuesday, while the yield of Pakistan Government International Bonds, maturing in 2024 and 25, declined from 64.4 percent to 63.9 percent and surged from 46.4 percent to 46.7 percent, respectively.   

Pakistan’s finance minister Ishaq Dar has also reiterated that the country is not going to default on international payments and it will fully honor its obligations and timely pay bond investors, including the bond maturing next month.    

Pakistani analysts expect that the country’s position will change after inflows from various bilateral and multilateral institutions and the upcoming 9th review of the $7 billion IMF program.