Pakistan Sees Sharp Decline in Default Risk, Surpasses Most Emerging Markets in 2025

Pakistan has recorded one of the most significant improvements in sovereign credit risk among emerging markets, marking a major shift in investor sentiment and market confidence. According to the latest data from Bloomberg, the country has seen a sharp decline in its default probability over the past 15 months, positioning it as the second most improved economy globally in terms of credit risk reduction, just behind Turkey.

The Credit Default Swap (CDS)-implied probability, which measures the market's perceived likelihood of a country defaulting on its debt, has dropped by 2,200 basis points for Pakistan between June 2024 and September 2025. This steep decline reflects a dramatic shift in how international investors view Pakistan’s debt sustainability and financial stability.

A CDS functions as a form of insurance for investors, and a lower price signals reduced risk. With Pakistan’s CDS spreads narrowing considerably, it’s clear that global markets now see the country as significantly less likely to default compared to just a year ago.

What makes Pakistan's performance stand out even more is the consistency of its progress. It is the only country in Bloomberg's emerging market sample to post quarter-on-quarter improvements in default probability throughout the past year. This contrasts with other economies such as South Africa and El Salvador, which posted modest risk reductions, and countries like Argentina, Egypt, and Nigeria, which saw rising default risks.

The improvement has been attributed to a mix of macroeconomic stabilization policies, structural reforms, and Pakistan’s strong commitment to timely debt servicing under its ongoing International Monetary Fund (IMF) program. These efforts have been further validated by positive credit rating actions from agencies such as S&P, Fitch, and Moody’s, all of which have acknowledged Pakistan’s progress in managing its debt and improving fiscal discipline.

According to Khurram Schehzad, Adviser to the Finance Minister, this sharp decline in risk is a sign of growing global investor confidence in Pakistan’s economic direction and reform agenda. He emphasized that Pakistan is rebuilding its market credibility and becoming one of the most improved sovereign credit stories among emerging markets.

The evolving trend signals that Pakistan is increasingly being viewed as a more stable and investable market, offering opportunities for investors looking at emerging economies with improving fundamentals.