Pakistan banks are highly exposed to sovereign debt, and risks are growing
The exposure of emerging markets banks to sovereign debt is at an all-time high, and tighter financial conditions are putting pressure on government finances. Hefty fuel subsidies and delays in IMF negotiations are further worsening the situation. In the emerging markets context, Pakistan stands out as having high levels of sovereign indebtedness and bank exposure to government debt. Pakistan banks hold government securities worth 8.6x times of their tier 1 capital, compared with a median 1.4x for other emerging markets. The yield on Pakistan eurobonds (maturing in 2024) has jumped from 5.1% at the start of the year to 17.