How times and fortunes change….

Spearhead Analysis – 30.10.2017

By Farrukh Karamat
Senior Research Coordinator, Spearhead Research

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”― Charles DickensA Tale of Two Cities

Unknowingly, Charles Dickens may have been portending the future of the Pakistan Stock Exchange (PSX – KSE 100 Index), when he wrote those famous lines, or so it seems. It was in 2016 that the PSX was ranked as the 5th best performing stock market for the year, by Bloomberg. This was followed up by the upgrading of the PSX to the MSCI Emerging Markets status, opening its door to global investors that track the index with US$1.4-US$1.7 Trillion in hand. It was towards the end of 2016 that a Chinese consortium bought a 40 per cent stake in the PSX at a cost of Rs.8.96 Billion (US$85 Million). This was followed up by the rise of the PSX to the record 52,876 points level in May 2017.

During the past 16 years, the MSCI Pakistan Index climbed over 14 per cent in dollar terms on a compounded annual growth (CAGR) basis, (The MSCI India index advanced 8.39 per cent annually during the same period), as per data from Bloomberg. The KSE-100 index rallied strongly from 1,772 points in January 2000 to around 48,300 in December 2016.  As per a Forbes report from September 2016, Pakistan is a frontier economy rather than an emerging market, and is, therefore, ahead in the numbers game.  

Since then the share prices have been falling and as of October 2017 almost US$18.5 Billion has been wiped off from the PSX, as the KSE-100 Index has been hovering around the 40,000 – 41,000 mark.  Speculation is rife that the market could test the 35,000 levels before it bottoms out and shows any signs of recovery. Within a year fortunes have been severely eroded, as people continue to lose money and have either opted out to cut their losses, or are waiting on the sidelines for any signs of relief. It is a market that is offering value at the lower prices, but the uncertainty within the political and economic spheres is hampering the entry of potential investors. And uncertainty is a great enemy of stock markets.

The long-drawn Panamagate investigation, the dismissal of the Prime Minister, the conflicting and often dismal economic news of the rising debt levels, falling exports, under-pressure foreign exchange reserves and rising fiscal and trade deficits have all served to the create an environment that is hardly conducive for investing. To top it all the steward of the economic ship, the Finance Minister, is under investigation for corruption and likely to be indicted by the Courts. All this continues to take a toll on the stock market and we see Fund Managers scrambling to try and minimize losses, as the prices continue to tumble with high levels of volatility.   

Amidst all this the speculation over an over-valued Rupee continues unabated, something that has been stated by multilateral agencies as well as Economists within Pakistan. However, to date the Finance Minister continues to maintain the exchange rate, though there has been some downward movement of the Rupee against other major currencies in the open market. The government continues to exhibit knee-jerk reactions, as was recently shown by the imposition of regulatory import duty on some 356 items. An attempt to control the rising imports, and a policy that is unlikely to provide the desired results of curtailing deficits.

The need is for structural reforms to address the imbalances in the economy and spur economic growth. The Pakistan Business Council took the initiative some time back to try and explain the situation to the Government and to try and jump start the economy. With domestic demand fairly robust there is a need to broaden the business and tax base to be able to increase collection. At the same time the export base needs to be increased to improve the inflows.

Foreign exchange reserves continue to fall and have touched the US$19 Billion level as the Government meets its commitments. The World Bank in a muddled report initially warned that Pakistan’s external sector situation could become unsustainable due to a lack of policy actions and stated that the country needs US$31 Billion to meet foreign financial obligations this year. After protests by the Government of Pakistan, the World Bank conveniently revised the figure downwards to US$18 Billion. However, the fact is that there are warning signs and distress signals, which need to be taken into account:

  • Pakistan’s capacity for repayment of external debt and liabilities is weakened and its foreign debt obligations are equal to 162 per cent of annual foreign exchange earnings, vs. 121.3 per cent in 2013.
  • The external debt servicing in relation to the annual foreign exchange earnings has increased by up to 16% since 2013, when it was 13%; and, is 30 per cent of export receipts vs. 20 per cent in 2013.
  • In 2013, the external debt and liabilities were equal to 193.2 per cent of exports, which have risen to 304.6% in 2017.
  • In 2013, gross public debt was Rs14.3 Trillion or 63.8% of GDP and has risen to Rs21.4 Trillion or 67.2% of GDP.
  • External debt stands at US$83 Billion and Pakistan lost US$2 Billion of foreign exchange reserves in the first quarter of the FY2017-18.
  • It has been projected that the current account deficit would cross US$16 Billion in FY2017-18, US$6 Billion higher than official estimates.

While the decline in the PSX, Forex Reserves, Exports and rising deficit levels are worrisome economic issues, these are all but symptoms of a larger malaise inflicting the economy. There is a lack of consistency in policy making and the will to enforce governance structures. It is apparent for all that the economy is under stress, from misguided policies, the ongoing political uncertainty, and the considerable cost being incurred to fight and eliminate the scourge of terrorism. Yet, there are opportunities to set the right direction and establish the policies to bring about genuine reforms and steer Pakistan towards higher growth and stability. For that we need competence and an ability to be able to objectively assess the situation and establish long-term policy frameworks. Knee-jerk reactions and continued borrowing need to be replaced with genuine revenue generating capacity from internal as well as external sources. It is time to harness the potential of this 207 Million strong nation and make sustainable economic growth the top agenda.