Abstract:
Economists typically use multiple indicators to assess the burden of
external debt, such as the ratios of the stock of debt to exports and to gross national
product, and the ratios of debt service to exports and to government revenue. As
opposed to those methodologies, this article examines the Pakistan’s external debt
position using a market based approach which analyzes the marginal costs of
external debt as indicated by the yields on the country’s Eurobonds and the spreads
on the Credit Default Swaps (CDS) traded in the international markets. The
results show a sharp decline in the yields on the Pakistani Eurobonds from their
peak reached during the global financial crisis (GFC) period and this decline was
largely driven by quantitative easing and the resultant low interest rates in the
international debt markets. Also, the continued decline in the yields in the more
recent period, 2013-2017, was due to strengthening of the county’s borrowing
capacity over the period. The analysis also shows that Pakistani yields seem to be
converging to yields for other Asian countries, even though that the yield-spreads
between Pakistan and others countries are still substantial. In conclusion the
decrease in bond yields and CDS spreads may signal that the country’s external
debt is currently at sustainable levels.
