In a unanimous decision, a 5-member Supreme Court bench has overturned the dismissal of the No Confidence Vote against Prime Minister Imran Khan. As a result, the dissolution of the National Assembly and call for early elections by Mr. Khan have also been declared null & void. The Prime Minister will now face a No Confidence Vote on April 9th unless he chooses to resign from office beforehand.
A new Prime Minister: The Opposition has more than the 172 votes or 50% majority in the National Assembly necessary to oust Prime Minister Imran Khan and elect PML-N’s Shehbaz Sharif as the new Prime Minister. Mr. Sharif, the younger brother of three-time Prime Minister Nawaz Sharif, has a reputation of being a capable administrator with a successful track record of running the Punjab province. His immediate course of action will likely include stabilizing an ailing economy and repairing relations with the West. Going forward, the National Assembly still has until mid-2023 before its term runs out but it is possible that early elections will still be called, perhaps later in 2022, as there are just too many parties in the joint opposition for friction not to arise.
IMF programme may be revived soon: The IMF programme has been hostage to the political uncertainty over the last few weeks. A new government will be better placed to take tough steps early on and revive the IMF programme quickly. Dr. Miftah Ismail, a former PML-N finance minister, has already backed talks with the IMF on the sidelines of the Annual IMF Spring Meetings. Earlier today, the SBP acted decisively in increasing the Policy Rate by 250bps to 12.25%. Similar quick decision making on the fiscal side will further shore up confidence.
Imran Khan will still stay relevant: Outside of government, Mr. Khan may likely find himself facing legal issues and attempts to discredit his policies. That said, he retains mass popular support and will be a force whenever elections are next called. The end to his reforms process is not inevitable where we believe that some reforms, important to our liking for Pakistan equities, will have lasting power. These include the preeminence of economic security across party lines (National Security Policy), institutional strengthening at the central bank and energy regulators, and improved social support programs.
Equities can rise: Pakistan has recently seen the perfect storm of risks coming together – domestic political uncertainty, tricky international relations, high global commodity prices feeding into inflation, and nascent security concerns. However, with political uncertainty reducing, an IMF programme arguably drawing near, and the central bank acting decisively, there is a tangible case for Pakistan equities to stage a rebound. The KSE100 trades at a FY22f P/E of 4.7x, at a c 40% discount to the last 10yr average. On Market Capitalization to GDP, not dependent on analyst estimates, the discount to the historical mean is also a sharp c 30%. Our top picks are UBL, FFC, ILP, LUCK and SYS.