Macro Analysis /

Pakistan politics heats up at a challenging time

  • Politics is heating up with PM Imran Khan having lost majority on paper. No confidence vote is on April 3

  • The external account is again a problem, with reserves falling sharply and the IMF programme facing risks

  • Pakistan equities held up in March. Top-down challenges remain but valuations are very attractive

Pakistan politics heats up at a challenging time
Raza Jafri
Raza Jafri

Executive Director, Research

Intermarket Securities
1 April 2022

Equities hold up despite political and economic pressures

Despite the no-confidence motion against Prime Minister Imran Khan and renewed macroeconomic pressures, the KSE-100 did well to gain 1.1% (US$: -2.3%) in March. However, sentiment remained cautious, with daily turnover at the KSE-100 averaging just U$25mn; while foreign investors accelerated their selling, mainly in Commercial Banks. If Mr. Khan is ousted, it could lead to a ‘national government’ ruled by a PML-N led coalition for the remainder of the National Assembly’s term or early elections. Political change comes at a challenging time, especially with Fx reserves facing renewed pressure, although there is arguably a case that valuations already capture much of the risks (forward P/E of 4.9x; at a c 40% discount to the 10yr average). 

Watch politics, reforms & Fx reserves

Prime Minister Imran Khan faces no confidence vote

The Prime Minister will face a no confidence vote on Sunday April 3. As it stands, it appears the joint opposition will have the numbers to reach the requisite 172 votes to oust him, especially after MQM-P broke ranks with the PTI. If this happens, Mr. Khan could potentially be replaced by PML-N’s Shehbaz Sharif, the younger brother of three-time Prime Minister Nawaz Sharif. The younger Mr. Sharif, a capable administrator with a successful track record of running the Punjab province, may choose to lead a coalition government for the remainder of the National Assembly’s term (until August 2023), or call for early elections.

Macroeconomic pressures are building

Fx reserves with the SBP fell by a sharp 25%mom to US$12.0bn in March (on debt repayments; import cover now less than 3 months), while the PKR lost 3% vs. the US$. The CPI print was elevated at 12.2% and secondary market bond yields are depicting an unusual gap versus the Policy Rate, which remains at 9.75%. The central bank has held back from increasing interest rates so far in the calendar year, preferring to look through the commodity price-driven increase in inflation; but it will likely be wary of fiscal slippages in the next meeting scheduled for late April. Of key concern, the IMF program has hit stumbling blocks soon after resumption, following fresh fuel and energy subsidies. Pakistan’s renegotiation on Reko Diq mine with Barrick Gold is a positive development but with no immediate bearing on the near-term macroeconomic situation.

IMF program remains key in the near-term

Timely disbursements of remaining tranches under the IMF program appear challenging, with ongoing talks affected by the PTI’s populist steps in March. Although a change in government may affect the long-term thesis for reforms, especially on anticorruption and tax generation, it may push Pakistan to turn to the IMF quickly. This can happen both under the PML-N which will have the space to take difficult steps early on, or a caretaker government which does not have to seek reelection. For Mr. Khan, even if he is ousted, it may not be the end of the line for him just yet. He retains mass popularity and will be a force when elections are next called. His reforms may be delayed, but it is early to say they will be derailed.

Outlook: Risks arguably in the price but wait for macroeconomic clarity

The end to the political impasse – whether Prime Minister Imran Khan stays or goes may lead to a knee-jerk positive reaction at the KSE-100, in our view. However, attention will turn very quickly to the shape of the economy and the fate of the IMF program. If Fx reserves continue to come off, and the IMF program is not revived quickly; it could sap local sentiment also. While forward P/E of less than 5x suggests limited downside from here, we would remain cautious in the near term and build positions on dips. As a result, we tilt our preferred portfolio towards defensive stocks. FFC replaces ENGRO due to a higher dividend yield (EFERT offers almost similar), while HUBC comes in for MTL (higher dividend yield for HUBC while MTL may be dragged by emerging pressure on future sales).