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Markets brace for Pakistan default risk as $7 billion debt looms: Bloomberg

By News Desk
March 03, 2023

MUMBAI: Bondholders are bracing for a potential default by Pakistan as the beleaguered nation struggles to meet billions of dollars in debt repayments by June.

The nation’s dollar bonds due next year slid to the lowest since November on Thursday as investors weighed its ability to honor $7 billion of repayments in the coming months, including a Chinese loan of $2 billion due in March, according to Fitch Ratings. The rupee slumped 6.7 percent to 285.09 per dollar at close, according to State Bank of Pakistan.

Pakistan was downgraded deeper into junk by Moody’s Investors Service this week as the country faced its worst economic crisis in decades, with foreign reserves plummeting and inflation soaring to a record high. Authorities in Pakistan are relying on a bailout loan from the IMF to stave off a default, which has remained elusive.

“There is definitely a higher risk for a default as negotiations with the Fund keep getting drawn out longer than expected while reserves continue to dwindle to precarious levels,” said Edwin Gutierrez, London-based head of emerging-market sovereign debt at Abrdn plc.

Pakistan’s 8.25 percent bond due April next year dropped 2.2 cents lower to 49.8 cents on the dollar, down for a third straight day. The nation’s external financing needs are estimated to be around $11 billion for the fiscal year ending June, including $7 billion in external debt payments, Moody’s said in a note Wednesday.

The nation needs to repay about $3 billion dues in the upcoming payments while $4 billion is expected to be rolled-over, the nation’s central bank Governor Jameel Ahmad said in an analyst briefing, adding that the nation is committed to make all debt payments.

“In the current extremely fragile balance of payments situation, disbursements may not be secured in time to avoid a default,” Moody’s analysts led by Grace Lim said in a statement on Tuesday, when the firm cut Pakistan’s credit rating to Caa3.

Meanwhile, Pakistan got a $700 million loan facility from China Development Bank in February, said Finance Minister Ishaq Dar. Premier Li Keqiang told the head of the IMF that China is open to participating in multilateral efforts to help heavily indebted nations “in a constructive manner,” China Central Television reported.

The Chinese Foreign Ministry said it is calling on all creditors to play a constructive role on Pakistan, when asked if China would rollover its loans to the nation.

“The Western-led commercial creditors and multilateral financial institutions are the basic creditors for developing countries, so China calls for a concerted effort of all parties to play a constructive role on the economic and social developments of Pakistan,” spokeswoman Mao Ning said Thursday at a regular briefing. Pakistan Prime Minister Shehbaz Sharif this week said an agreement with the IMF could be reached within the next few days. Dar said the negotiations “are about to conclude and we expect to sign Staff Level Agreement with IMF by next week.” in a tweet on Thursday. The nation has failed to meet such deadlines in the past.