KARACHI: Pakistan’s international bonds continue to trade at a distressed level despite forceful statements by Finance Minister Ishaq Dar about the unlikelihood of a sovereign default.

According to data compiled by Bloomberg, the interest rate on the dollar debt issued by Pakistan is hovering between 30 and 40 percentage points above the US treasury bond of comparable duration.

For context, the gap was in single digits at the end of 2021. Any bond that offers a yield exceeding the US treasury rate of similar tenor by 10 percentage points is considered distressed debt i.e. it trades at a significant discount in the secondary market as its issuer carries a high potential for default.

Speaking to Dawn on Monday, Optimus Capital Management Ltd Executive Chairman Asif Qureshi said the widening gap between the return on Pakistani bonds with that on the comparable US debt is concerning, but “not a conclusive indicator” of Pakistan’s imminent default.

Rising yields on sovereign debt don’t signal impending default as many countries with worse-performing bonds still ‘afloat’, experts say

“We can avert sovereign default anytime we want. All we need is the International Monetary Fund (IMF),” he said, adding that the foot-dragging on the revival of a $7 billion loan programme has put the economy in jeopardy. “We’ve still not reached the point of no return,” he added, emphasising the need for an immediate revival of the loan programme.

Pakistan currently has eight conventional and Islamic bonds trading in the international bond market. All of these dollar-denominated bonds trade at a steep discount, meaning their market prices are less than their face values.

Data released by Topline Securities on Monday showed the 10-year Pakistan Government International Bond, which is to mature in April 2024, traded at 52.4 cents to a dollar. In simpler words, it means the debt instrument is trading at only 52.4 per cent of its face value.

As a consequence, the bond’s yield — which is inversely proportional to its price in the secondary market — clocked in at 102.79pc.

However, analysts point out that the share of borrowing through international bonds and sukuk is relatively small within Pakistan’s public external debt. They constituted only 8.1pc or $7.8bn in the total public external debt of $96.3bn as of March.

In contrast, multilateral debt — owed to international financial institutions — accounted for a 38.5pc share or $37bn. “Other bilateral” debt amounted to $17.6bn, Paris Club $8.7bn, IMF $7.5bn and commercial loans/credits $5.8bn, according to data compiled by Arif Habib Ltd.

Another reason for why rising yields on sovereign debt cannot be taken as an indisputable indicator of impending default is the fact that many countries with worse-performing bonds are still keeping their heads above water in the international market.

For example, the spread over US treasuries offered by the Tunisian bond is larger than that of the Pakistani bond. Similarly, bonds issued by Ghana and Belarus — countries that are already in default — are performing better than Pakistani bonds, which implies that bond yields aren’t the sole indicator of whether a country is going to default.

Published in Dawn, May 30th, 2023