Dawn Business
KARACHI: Credit Default Swap (CDS) spreads (an insurance against sovereign risk) have widened by 200 basis points, reflecting growing concerns about Pakistan’s external situation. Eurobond yields have increased by over 200bps, indicating a clear repricing of sovereign risk, said Faisal Mamsa, CEO of Tresmark. He noted that CDS spreads have risen from 344 bps to 577 bps, indicating tighter external financing conditions. CDS spread is a market-based measure of the risk that the country (sovereign) or its financial institutions will default on their debt obligations. A CDS acts as an insurance policy for investors holding Pakistani bonds; the “spread” is the annual cost (premium) to purchase this insurance. Indicates a clear repricing of Pakistan’s sovereign risk Mr Mamsa said the CDS has been increasing since the beginning of the Gulf War. If the war against Iran by Israel and the United States continues for another couple of weeks, financial institutions and the equity markets could enter a deep recession, which means economic growth might be hardly noticeable on the positive side. There has been a withdrawal of over $350 million in portfolio investment since the beginning of the war, mainly from T-bills and equities, driven by US dollar strength and an increasing Pakistan risk premium. This is significant. However, the remaining amount of portfolio investment is already small (around $600m). “We do not expect a further exodus beyond $100m-150m from here. This suggests that while the initial adjustment has already happened, the marginal pressure from portfolio flows is now limited,” said Mr Mamsa. When Pakistan’s CDS spreads rise, it signals that international investors perceive a higher likelihood of default. This is usually driven by low foreign exchange reserves, political instability, or uncertainty surrounding IMF program compliance. However, Pakistan’s foreign exchange reserves are relatively strong at over $21bn, and the IMF programme is on track. The biggest obstacle is the ongoing war, which has forced the foreign investors to keep a distance from Pakistan. The war has deeply reduced the country’s hope to receive $40bn in remittances despite the fact that most of the Pakistanis working in the Gulf countries are still there waiting for the end of the war. High CDS spreads act as a “risk premium.” When Pakistan’s sovereign CDS spreads are high, it becomes much more expensive for both the government and Pakistani banks to borrow money from international markets. Pakistan is unable to launch bonds, neither Eurobonds nor Panda Bonds, while the commercial banks could charge exorbitant returns on loans from international banks. Mr Mamsa said that Pakistan is to face a near-term cluster of dollar outflows — around $200m of oil payments in the coming week and $1.3bn Eurobond maturity on April 8. These are sizeable outflows but not unexpected. The State Bank of Pakistan has already been managing liquidity, including buy/sell swaps to support reserves, which have increased by $544m in the first 19 days of the conflict, indicating that funding is being managed. The monthly energy bill is approximately $1bn for oil imports and $300m for gas, but the current rate could raise it to $1.4bn for oil and $100m for gas (which is largely unavailable), resulting in a net increase of only $200m. While the market concentrates on oil prices, the system is adjusting volumes. As a result, the net external pressure from energy remains contained, not explosive,” he said. Published in Dawn, March 29th, 2026
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