Strategy Note /

Pakistan opposition rally but Army-Imran-China triumvirate to persist

  • The opposition (Nawaz-PMLN, Zardari-PPP, Fazl-MMA) have, for now, united and are attempting to rally support...

  • ...Not only against PM Imran Khan's government but also against the military establishment (a rubicon has been crossed)

  • Short term, this may be disruptive but, long term, the governing triumvirate of the Army, PM Khan and China persists

Pakistan opposition rally but Army-Imran-China triumvirate to persist
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
19 October 2020
Published byTellimer Research

The opposition parties have banded together to corral their support base in criticism not only of Prime Minister Imran Khan's civilian government but also, in a direct, by name, manner, the leadership of Pakistan's deep state, the military and intelligence services. Their stated ambition is to conduct a series of rallies to pressure the civilian government into resigning and conducting early elections.

Short term, they are likely to distract the government from its urgent priorities (Covid-19, inflation and fiscal deficit control, external debt issuance, the IMF loan), compounding its loss of mass popularity since winning the 2018 election, and this is a negative for the investment case on this time frame. Long term, there is a very low probability of any change to the structural reform agenda of the governing triumvirate of the Army, Prime Minister Khan, and (externally) China, and the opposition may be rallying its way to its demise.

Relative to Asia small EM peers, Pakistan equities match the cheap value on offer elsewhere (eg Indonesia, Philippines, Sri Lanka, Thailand) but with a stronger structural reform story. But it has FX and fiscal risks (like Sri Lanka).

FX and equities: Cheap with risk

Pakistan's FX rate has depreciated 4% ytd and is vulnerable should a fresh bout of economic disruption occur. The real effective exchange rate suggests the spot FX rate is c5% cheap (both on an absolute basis and relative to the 10-year median). However, the current account deficit is forecast at 2.4% in 2021 (by the IMF) despite low oil prices (fuel imports are 4% of GDP) and is reliant on continuing surprising strength in remittances (c7% of GDP) external debt/GDP (public and private) is c45% and FX reserves/imports is merely 3.6 months.

Pakistan equities (KSE 100 index) are down 7% ytd, on trailing PB or 1.2x (for 10.5% ROE), a 26% discount to the five-year median. The large caps that make up MSCI Pakistan (with roughly equal weights for HBL and MCB in Banks and OGDC in oil & gas) and are of main interest to foreign institutional investors are down 21% (compared with up 3% for MSCI EM, down 5% for FM and down 15% for FEM) and on PB of 0.9x (for 14.5% ROE), a 41% discount to the five-year median.

Democracy champions or corrupt charlatans?

Opposition supporters characterise this effort as a reflexive response to economic stress exacerbated by policy errors by the government slavishly adhering to IMF and FATF diktats, a noble attempt to advance democracy in the face of media suppression and the selective political victimisation of its leadership.

Critics of the opposition describe this as the desperate and cynical tactics of an embattled opposition leadership increasingly boxed in by legitimate legal challenges into its egregious corruption, aligned with foreign powers like India that seek to destabilise Pakistan by any means possible, with a demonstrably disastrous record of economic management, and whose political governance during their own time at the helm of civilian politics betrayed both a willingness to work with the same deep-state vested interests they now criticise and a complete disregard for the advancement of democracy and social justice.

Either way, a disruption short term

In the short term, the opposition, at a minimum, has the capability to distract the government from what matters most to investors: countering Covid-19, getting the IMF program back on track and implementing structural reform. In the long term, the opposition is very unlikely to destabilise the triumvirate that effectively governs Pakistan: the civilian government led by Prime Minister Khan, the Army and the key external supporter China.

Long term, likely no change to political course

In the long term, the opposition is very unlikely to destabilise the triumvirate that effectively governs Pakistan. This is because of a number of factors.

  • The Army-Imran-China triumvirate is internally united (ie self-reinforcing):

    1. The Army remains the dominant domestic political actor, with the most coherent and well-funded internal organisation. Without it, neither does domestic reform proceed (of course, at a pace to its liking) nor are the strategic goals of Pakistan's external partners advanced (consistently, China, and, intermittently, the US and Saudi Arabia);

    2. The civilian government led by Prime Minister Khan is still viewed by the army as sufficiently competent and loyal (in terms of its willingness to act as a junior partner, sincerity in pursuing economic repair and domestic structural reform and its effective publicity on the global stage of the dangers of ethnically discriminatory social policies in Modi's India). The support of the mass population has dropped from its post-2018 election peak but is still sufficiently high; and

    3. China is the key long-term external geopolitical supporter of Pakistan, because of its own vested interest to realise the economic supply chain benefits of its China Pakistan Economic Corridor and to maintain a united geopolitical front against Indian and US regional interests.

  • The unity of the opposition is fragile – The same characters (Nawaz Sharif of PMLN, Asif Zardari of PPP, Fazl-ur-Rahman of MMA) have united for short periods in the past (eg in the pact between Nawaz and Zardari during the Musharraf era) before quickly pulling apart (driven provincial interests, eg Punjab versus Sindh, or an opportunity to strike an independent accommodation with the Army, eg Nawaz prior to the 2013 election) and there are divisions within the opposition parties themselves (eg between Nawaz Sharif and his brother Shehbaz Sharif, who, after the 2018 election loss, has been less confrontational with the Army).

  • Nawaz has singled out the Army leadership, crossing a rubicon – Unlike the mass rallies prior to the 2013 election or the mass protests after that election, in both cases led by Imran Khan, Nawaz Sharif has openly criticised the leadership of the Army and Intelligence services by name, Chief of Army Staff General Qamar Javed Bajwa and Head of ISI Lieutenant General Faiz Hameed, respectively, in his recent speeches. His speeches have been broadcast remotely from his residence in the UK. Not only does this bring the Army directly into confrontation with the opposition but this may also test the willingness of other members of the opposition (who do reside in Pakistan or also face ongoing criminal cases in Pakistani courts) to show solidarity under this rhetoric.

  • Upcoming Senate elections – Half of the seats in the Senate, the upper house of Parliament, are up for election in March 2021. Currently, the government is in the minority in the Senate and the ruling PTI itself has merely 17% of seats. Should the governing coalition establish a majority in the Senate then it will have the ability to pass constitutional reform, eg making it harder for those convicted in criminal cases to run for office or lead political parties. Indeed, this looming election may be one factor contributing to the timing of the opposition's efforts to mobilise.

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