On Monday, Pakistan’s five-year currency default swap (CDS) index reached a new high of 75.5%, up 19 percentage points, signaling that the country lacks the resources necessary to cover rising import costs and prompt repayment of its foreign debt.
In connection with a five-year Sukuk (a bond that complies with Shariah) that would mature on December 5, 2022, Pakistan is required to make a repayment of $1 billion.
Topline Research reports that the yield (rate of return) on the Sukuk climbed by 964 basis points to 69.96% in a single day. The increase in yield may have investors worried that the country won’t be able to repay the $1 billion Sukuk.
Jameel Ahmad, the governor of the State Bank of Pakistan (SBP), later stated that the nation had “over $9 billion, which are more than enough” in foreign exchange reserves to cover imports and pay off foreign debt.
The five-year CDS showed a significant likelihood of default after Pakistan disclosed that Saudi Crown Prince Mohammad bin Salman had cancelled his visit to Islamabad and that a new date would be revealed soon.
The crown prince’s visit was expected to result in the announcement of more than $10 billion in investments. The anticipated inflows would have resulted in a rise in Pakistan’s foreign exchange reserves.
MSCI Review
According to the research firm, the MSCI dropped MCB Bank from its main Frontier Market (FM) index and added it to the Frontier Market small-cap index in its semi-annual review release on November 10, 2022.
There are currently only two companies from Pakistan still included in the MSCI FM index, Lucky Cement and Oil and Gas Development Company.
Although MSCI did not disclose Pakistan’s position in the index, it is currently believed to be 0.7%. On November 30, 2022, the new FM index will go into effect.
According to the MSCI’s framework for classifying markets, the FM index’s members must have a full-cap market size of $1 billion, a free float market capitalization of $91 million, and a 2.5% annualized traded value ratio.
Pakistan was already moved from the Emerging Market to the MSCI FM in November 2021.
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