Strategy Note / Pakistan

Pakistan: Stock exchange attack highlights how rare terrorism has become

  • Reportedly, all 4 terrorists shot by security forces, 2 fatalities out of 1,000 staff inside, no disruption to trading
  • Attack highlights rarity of terror in recent years: civilian deaths related to terror are less than 5% of the 2012 peak
  • Better domestic security and improving governance underpin investment case (trailing PB on 40% discount to 5y median)

Terror attacks are always tragic but they are not always shocking. If this morning's attack on the Pakistan Stock Exchange had occurred five years ago, it would not have been unusual in the context of prevailing chronic insecurity. This is not the case today, given that the 2020 run-rate for civilian deaths related to terror is less than 5% that of the 2012 peak and less than 15% of the 2015 level.

Improving domestic security is the foundation of the investment case in Pakistan: improving governance, stable military-civilian relations, orthodox economic policy gains, infrastructure upgrade, very cheap valuation all build on it. (Pakistan has minimal economic contribution from international tourism).

The small scale of this attack and its reportedly swift resolution do not change our views that Pakistan is a dramatically more secure place today compared to 5 or 10 years ago (and certainly in the last 5 years attacks targeting foreign visitors have been extremely rare compared to Bangladesh, Egypt, Kenya, Philippines, or Turkey).

Investment case recap

Pakistan’s economic improvement has been derailed by Covid-19 reversing growth (despite large interest rate cuts), widening the primary fiscal deficit (due to lower tax revenues); and weakening the FX rate. While lower oil prices alleviate the import bill, this is offset by greater risk to remittances from the GCC. The silver lining is decelerating inflation and rapidly mobilised external funding (IMF, Asia Development Bank).

Governance reform continues with an unprecedented public investigation into unjustifiable price inflation by the sugar cartel (which has led to a casualty within the most senior echelon of the ruling party, Jehangir Tareen in the PTI – something unthinkable under previous civilian or military governments) – and restructuring of state-owned enterprises (eg Pakistan Steel Mills).

While military friction continues at the Indian border, the confrontation between China and India is a reminder that there is an overall balance of power which constrains both sides.

Pakistan is still cheap enough and economic policy, including FX rate flexibility, is sensible enough to merit an investment case based on structural improvement in governance (a root cause of corruption, economic short-termism, and insecurity) and infrastructure (China-Pakistan Economic Corridor).

The KSE100 index is down almost 25% ytd, underperforming EM (down 8%) and FM (down 15%). Trailing PB and PE are on c40% and 20% discounts to respective 5-year medians. The FX rate has depreciated c8% ytd (real effective exchange rate is close to 100, about a 5% discount to the last 10-year median).

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Macro Analysis / Global

Courage under Fire: Policy Responses in Emerging Market and Developing Economies to the COVID-19 Pandemic

International Monetary Fund
3 June 2020

The coronavirus crisis is a crisis like no other, and for emerging market and developing economies (EMDE), it has triggered a policy response like no other, both in scope and magnitude.

Despite their diversity, and in some cases, strained resources, this large group of countries—consisting of emerging markets and low-income countries—have bolstered the provision of health services and extended unprecedented support to households, firms, and financial markets. While limited policy space has kept the response at a smaller magnitude than in advanced economies, some even managed to help other countries.

A whole new world

Economic activity in EMDEs has decelerated at a pace unseen in at least 50 years as the impact of the COVID-19 pandemic ravages the global economy. Several countries are experiencing a sharp decline in trade and capital flows, and the impact of an unprecedented decline in oil and other commodity prices. A spate of sovereign downgrades has occurred.

The IMF’s Policy Tracker summarizes key policy responses to the COVID-19 pandemic, and within these responses, there are some common threads.

Fiscal policy to save lives and protect livelihoods

Fiscal policy has been at the forefront of the EMDE response. Within EMDEs, the health crisis is necessitating massive health spending, though this increase has been dwarfed by the resources needed to support the broad economy. Countries have provided loans, guarantees, and tax breaks to corporations and SMEs, and extended support to vulnerable households with higher unemployment benefits and subsidies on utility prices.

Financing for these new measures emerged from a variety of sources, including borrowing, drawing down buffers, reprioritizing within existing budgets, and multilateral support.

Some economies entered this crisis in a vulnerable state with already sluggish growth, high debt levels and limited fiscal space to support the health sector and the flagging economy. About half of all low-income countries were considered in debt distress or at a high risk of debt distress even before the crisis, as assessed by the IMF’s Debt Sustainability Framework. Partly reflecting these constraints, the total discretionary fiscal response to the shock has been lower (although still sizeable) in both emerging market and low-income economies at 2.8 and 1.4 percent of GDP respectively in extra spending and tax reductions, compared with 8.6 percent of GDP in advanced economies.

Monetary and financial sector support—an anchor for stability

EMDE central banks cushioned the impact of the shock on credit conditions through policy rate cuts and liquidity injections. Unlike previous episodes of capital outflow pressures—including the early stage of the Global Financial Crisis—most emerging market economies lowered policy rates (most of them by 50 basis points or more) rather than raising them. This could be attributed to lower inflation pressures and generally more credible monetary policy frameworks.

Like many advanced economies, some emerging markets possess little room to cut interest rates further and implemented “unconventional monetary policy” responses—such as purchases of government and corporate bonds.

Regulatory restrictions including on liquidity and loan classification have been loosened to help banks play a more supportive role during the pandemic.

In addition, some countries including China and Colombia have relaxed select macroprudential measures—constraints on lending and borrowing introduced to contain excessive loan growth, and the build-up of systemic risk in the financial sector that can occur in good times. Now, a relaxation can support the supply of credit to hardest-hit individuals and economic sectors.

Staying flexible

Currencies of EMDEs with flexible exchange rates have depreciated in response to outflow pressures and heightened risk aversion—over 25 percent in a few cases.

Many economies took advantage of their buffers to offset some of the pressure by intervening in the foreign exchange market and drawing down their international reserves. A few countries eased existing capital controls on inflows, while recourse to measures to curb capital outflows has been very limited.


Digitization—a lifeline to protect the vulnerable

Countries such as Bolivia and Indonesia are using digital technology to counteract the sudden economic distress on households and small and medium-sized enterprises, and to limit the spread of the disease by encouraging cashless payments. Others, such as Colombia and Kenya, are ensuring affordable access to digital (easing restrictions on internet access) and financial services (mobile money and electronic payments charges). Zambia provided subsidies to small-scale farmers through the digital platform.

Digital solutions have helped target relief to the vulnerable and enhance the effectiveness of traditional macro policies.

Managing supply disruptions

As the pandemic and prolonged lockdown hampered global supply chains, many countries took steps to ensure food security and continued access to medical supplies, mostly on a temporary basis. For example, several countries introduced price controls and issued regulations against price gouging for basic food items and medical supplies. Some eased import controls. Unfortunately, in several cases restrictions were introduced on the exports of food and pharmaceuticals.

International solidarity—helping countries reach further

In response to the COVID-19 shock, the global financial safety net has been activated and strengthened. The U.S. Federal Reserve has established new swap lines with central banks in several major advanced and emerging economies.

The G-20-led debt moratorium initiative, and financial assistance from the IMF and other institutions are helping EMDEs cope with the challenges. The IMF has quickly provided emergency assistance to more than 60 countries. Further, as demand for liquidity increased, the IMF recently established a new Short-term Liquidity Line as part of its COVID-19 response to augment its lending toolkit. In addition, massive liquidity provision by major advanced economy central banks, while directed primarily at domestic financial conditions, has also alleviated pressures on emerging market and developing economies.

At the same time, EMDEs are also extending assistance to each other and other countries in need. In particular, Regional Development Banks are providing support for private sector enterprises, trade finance and continued access to medical supplies. Examples of bilateral assistance include Albania, which dispatched a team of doctors to Italy, and Vietnam, which donated medical supplies to neighboring countries as well as advanced economies.

EMDEs have been heavily affected by the COVID-19 shock and market reaction that it triggered. The analysis of the IMF Policy tracker shows an extraordinary policy response, bolstered by innovation and international cooperation. In this unprecedented and fast-moving situation, countries can benefit from learning from their peers, and the Fund is committed to collecting and sharing best practices and incorporating this data into its own analysis to continue to assist our membership.

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Macro Analysis / Global

Central banks and the new world of payments

Bank for International Settlements
30 June 2020

Digital innovation is radically reshaping the provision of payment services. Yet technology by itself is not sufficient to put in place a fast, efficient and cost-effective payment system. The Covid-19 pandemic has accelerated trends that were already under way and highlighted how financial services need to be more inclusive and accessible. In this context, the central bank can play the pivotal role as the operator of the underlying infrastructure, catalyst for innovation and overseer of the system. Central bank digital currencies (CBDCs) may be an important step in the evolution of the relationship of the central bank with society. All of these developments make central bank public goods more important than ever, and central banks need to be at the cutting edge of technology to serve society.

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Macro Analysis / Global

Will Climate Action Survive Covid-19?

ING Think
15 June 2020

Why all is not lost for climate action

Yet despite these formidable headwinds, all is not lost for advocates of climate action. Before the pandemic, climate change was at the very top of the global policy agenda. Indeed, given the need for ongoing stimulus to sustain recovery, there is the opportunity for pre-existing climate action plans to be accelerated and repurposed to this end. A prime example would be the EU’s Green New Deal. The UN’s disaster recovery slogan "Build Back Better" has already been co-opted to this cause.

One factor which may help the green cause is that sceptical populist regimes are facing criticism for slow or disorganised responses to the pandemic. They may try to spin their way out of blame, but the relative success of other regimes will be hard to suppress.

The US is shaping up as a crucial battleground. While the final reckoning on the pandemic is some way off, it is already clear that President Trump has not enjoyed the same popularity bounce that other leaders have. Indeed, following public anger over his response to widespread protests over police violence, polls show him falling further behind his Democratic challenger Joe Biden in the run-up up to the elections in November. Were Biden to win, he has pledged that the US would re-join the Paris climate agreement and commit to net zero greenhouse-gas emissions by 2050. And if Democrats retake the Senate, too, some features of the Green New Deal could even be on the table.

At the global level, the ending of the pandemic may also present a window of opportunity to mobilise popular support for action on climate change. Governments have shown their ability to take radical action and enforce drastic changes in social behaviour. This will give them credibility as agents of change. On top of this, success in the global effort to produce a vaccine would be a major win for cross-border cooperation.

While the sense of solidarity engendered by the fight against the pandemic may be frayed by its unequal impact, the resulting sense of injustice could be channelled into climate activism. This possibility is reinforced by the damage inflicted on the livelihoods of the young, who tend to be more concerned about green issues.

Moreover, the longer the pandemic persists, the more the new climate-friendly behaviours are likely to become embedded. Surveys are already starting to confirm the psychologists’ beliefs that repetition is turning them into habits. The step shift towards digital interaction and commerce may therefore permanently lower the growth in travel and resource use. While there will still be craving for physical interaction, preferences may be tilted to fewer but higher quality interactions.

The grass roots support for climate action would also be given added momentum if the pandemic is accompanied, or quickly followed, by a further round of exceptional climate events such as storms, fires and floods. This would snap attention back to the climate problem, particularly as it would heap more pressure on already-stretched emergency response resources.

Yet we cannot escape the fact that the appetite for climate action will be largely dictated by the economic hangover from the pandemic. Here, the fact that our more digitalised lifestyles are cheaper is encouraging. Less commuting, travel, and dining out will bring welcome relief to household budgets. Hard-pressed and debt-burdened businesses will also gratefully embrace any cost savings that stem from digitalisation and remote working, and some of this will feed through to the benefit of consumers.

But this brings us back to the most pressing challenge posed by the pandemic legacy. Digitalisation and corporate cost-cutting may translate into further job losses that make it all the harder to reduce the current spike in unemployment.

To gain popular support, the narrative needs to shift from a ‘green recovery’ to a broader ‘sustainable recovery’, one with the welfare of people at its heart. After all, climate action is but one of the UN’s 17 Sustainable Development Goals (SDGs), and it’s not for nothing that people come first in the ‘triple bottom line’ of people, planet and profits. So amid the economic hardship that will flow from the pandemic, income and jobs will clearly be the top priority.

Since the pandemic is hitting lower income groups particularly hard, a recovery in the labour market will serve to reduce inequality. But to be truly sustainable, politically as well as economically, the recovery will also have to develop broad support across society and business.

This is a particular challenge in societies that are already highly polarised, not just politically, between left and right, but also culturally between “open” and “closed” identities. Here the US is again critical. The risk is that strongly Progressive Democrat policies might jeopardise the growing support from moderate Republicans for climate action. This could ultimately lead to a renewed backlash from the populist right.

This means seeking a smart suite of policies balancing the green gains from investment and subsidies with the political pains from tax and regulation. Those pains will need to be distributed in a socially tolerable manner. As France’s experience has shown, a regressive tax that hits rural commuters or other politically influential constituencies will face strong resistance.

To some extent the challenge be mitigated by central banks monetising the pandemic-induced spike in public and private borrowing. But this will still leave a long shadow of debt to be worked off in a way that is acceptable across social groups and across time. Thankfully, the likelihood that interest rates will remain low means that there is no need to hurry.

The pursuit of a sustainable recovery calls for a balanced partnership between government and business. Climate action that leans too heavily on ‘big government’ solutions of public investment, progressive taxation and regulation would undermine the valuable contribution that could come from private investment, innovation and market mechanisms. Moreover, demonising carbon-heavy 'brown business overlooks the important role of the fossil fuel and nuclear industries in the multi-decade transition to the net zero emissions world. This means that some state support may be needed to deliver the required investment.

Fortunately, even prior to the pandemic, the idea of sustainability and inclusive growth was gaining ground in business circles. Companies and investors have increasingly championed a shift from the model of shareholder capitalism to one of stakeholder capitalism, embracing broader sustainability goals. Investors will have noted that companies leading in this direction have outperformed during the pandemic.

Nevertheless, the early movers in business still face a collective action problem. While investor attitudes are starting to change more rapidly, most shareholders remain focused on short term returns, particularly after the pandemic-induced losses. This means that businesses stressing long-term sustainability risk punishment in the financial markets. Governments and regulators will need to recraft the rules of the game if they wish to accelerate the change.

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Macro Analysis / Global

Which jobs are most at risk because of COVID-19?

18 May 2020

Effective policies to minimize job losses in the wake of the COVID-19 pandemic require knowing which jobs are at most risk. While almost all European economies are under a lockdown, not everyone will suffer to the same extent. Those who can work from home, whose jobs do not require face-to-face interaction with others, or are in essential industries can more easily continue to earn a living. In contrast, those whose jobs are nonessential or cannot be performed from home are facing the largest income losses.

Based on these criteria, we identify the jobs most at risk in the European Union. We combine indicators on the occupations that can be done from home (as proposed by Dingel and Neiman, 2020) or those that require extensive face-to-face interactions with clients or co-workers (as suggested by Avdiu and Nayyar, 2020), with a new indicator of what industries are considered essential by governments and hence not susceptible to mandated lockdowns. Jobs at most risk are those exposed to both threats—they are in nonessential industries and cannot be performed from home or require face-to-face interaction.

Measures of which sectors are essential are only weakly correlated with measures of home-based work and face-to-face interaction. Thus, merely relying on whether the work can be performed from home and/or requires face-to-face interaction will provide a partial picture of which jobs are at risk.  Combining indicators of what industries are legally essential, with the share of jobs that can be performed from home reflects labor market risk more clearly. (As explained in detail in Garrote Sanchez, Gomez Parra, Ozden and Rijkers, 2020)

More than half of all jobs in the EU (58 percent) are in sectors considered essential. Figure 1 shows the distribution across subnational geographic areas. The share of employment in these essential industries varies significantly and tends to increase with income. Luxembourg, Scandinavian countries, France, the Netherlands, and Belgium have a higher share of employment in essential sectors. Southern countries like Spain and Italy are more reliant on nonessential industries, such as tourism.

Figure 1. Percent of jobs considered essential, European Union, Norway, and Switzerland, 2018

Figure 1. Percent of jobs considered essential, European Union, Norway, and Switzerland, 2018

Source: Authors’ calculations based on data from Eurostat, European Union Labor Force Survey (2018).

In the EU, 35 percent of all jobs can be done at home. This  is very similar to Dingel and Neiman’s (2020) finding that 37 percent of U.S. jobs can be performed at home. Jobs in the information and communications technology, finance, and education sectors are highly amenable to working from home. Jobs in agriculture and hospitality (hotels, restaurants) are less so. Wealthier and mostly Northern European countries, like the Netherlands, Denmark, Norway, Switzerland and Sweden, are characterized by a greater prevalence of work that can be done from home. In contrast, the poorer Southern European countries and the new member states in Eastern Europe have relatively fewer jobs that can be done from home.

A similar and related measure is the extent of face-to-face interaction a job requires. While this is related to home-based work, correlation is not perfect. Many jobs, such as in manufacturing, cannot be performed at home but do not involve significant face-to-face interaction. In the EU, 24 percent of jobs do not require face-to-face interactions. The prevalence of jobs requiring little face-to-face interaction is not necessarily correlated with income. In fact, it is highest in central European countries such as Czech Republic, Hungary or Slovakia, due to a higher share of manufacturing jobs.

Jobs in nonessential industries that are not amenable to telecommuting account for 30 percent of all employment in the EU. The ratio is higher in Southern and Eastern Europe and it is between a third to half of all jobs in large parts of Portugal, Spain, Italy, Greece, Romania, Czech Republic, Hungary, and Slovakia (Figure 2). In contrast, the share of vulnerable jobs is significantly lower in Scandinavia, France, Germany, and the United Kingdom.

Figure 2. Percent of jobs considered nonessential and not amenable to telework

Figure 2. Percent of jobs considered nonessential and not amenable to telework

Source: Authors’ calculations based on data from Eurostat, European Union Labor Force Survey (2018).

Combining instead our nonessential criterion with the extensive face-to-face requirements yields a qualitatively similar picture (Figure 3). The main exception is that Central and Eastern European countries are now less exposed since a larger share of their jobs are in the manufacturing sector. These jobs are not easily amenable to home-based telework arrangements, but they do not require face-to-face interactions either. In other words, factories can weather social distancing better when compared to many nonessential services. This can be a saving grace for Eastern European countries in this crisis.

Figure 3. Percent of jobs considered nonessential and with extensive face-to-face interactions

Figure 3. Percent of jobs considered nonessential and with extensive face-to-face interactions

Source: Authors’ calculations based on data from Eurostat, European Union Labor Force Survey (2018).

The maps above point to a disturbing pattern; European regions that are already economically disadvantaged are also likely to be plagued by the largest labor market crisis in recent history. The share of jobs directly threatened by the COVID-19 crisis is strongly negatively correlated with regional GDP per capita. A 10 percent increase in regional GDP per capita is associated with a 0.5 percentage point reduction in jobs at risk, according to our naive estimates. (Details are in Garrote Sanchez, Gomez Parra, Ozden and Rijkers, 2020)

This negative association between share of vulnerable jobs and income levels also holds within countries. Figure 4 shows that workers with the lowest pay suffer the highest vulnerability. The share of workers who cannot work from home, are working in nonessential sectors, in jobs requiring extensive face-to-face interaction all sharply decline with income. Workers in the bottom earnings decile are more than twice as likely to be at risk than those in the top income bracket, since 42 percent of all workers in the bottom decile are employed in jobs in nonessential industries that cannot be performed at home, whereas  such jobs only account for 16 percent of employment among workers in the top income decile.

Figure 4. Vulnerability of jobs by income decile

Figure 4. Vulnerability of jobs by income decile

Source: Authors’ calculations based on data from Eurostat, European Union Labor Force Survey (2018).

A second dimension of vulnerability is the age distribution of workers. Unlike the health risks of COVID-19 which steeply increase with age, the economic risks are concentrated among the young and decline with age (Figure 5). Similar patterns hold for less-educated workers (Figure 6)

In summary, COVID-19-induced labor market pain is disproportionately borne by young, poorly educated and poorly paid workers, and by regions that are already less well-off and characterized by a greater prevalence of temporary contracts. Through its employment effects, the lockdown is bound to increase inequality.

Figure 5. Vulnerability of jobs by age groups

Figure 5. Vulnerability of jobs by age groups

Source: Authors’ calculations based on data from Eurostat, European Union Labor Force Survey (2018).

Figure 6. Vulnerability of jobs by education level

Figure 6. Vulnerability of jobs by education level

Source: Authors’ calculations based on data from Eurostat, European Union Labor Force Survey (2018).

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Strategy Note / Kazakhstan

Kazakhstan: Succession risk could spoil its appeal among oil peers

  • Managed succession in March 2019 followed three decades of post-independence, authoritarian rule under Nazarbayev
  • A power struggle between Nazarbayev, Nazarbayeva (his daughter), and Tokayev (his successor) threatens to unravel it
  • A setback for the investment case, relative to oil exporter peers, but not a derailment at this stage
Hasnain Malik @
Tellimer Research
3 May 2020

The bubbling to the surface of political succession risk is significant but not, at this stage, sufficient to change our positive view on Kazakhstan, relative to other oil exporters (all of whom are struggling with the political and economic fallout from low oil revenues and Covid-19).

The managed transition of the leadership – involving former President Nursultan Nazarbayev (aged 79), current President Kassym-Jomart Tokayev (66), and Dariga Nazarbayeva (56) – may be unraveling.

Five events in recent months point in this direction:

(1) 2 May 2020: President Tokayev removes Head of Senate Nazarbayeva (a position from which she could have succeeded to the presidency).

(2) 30 April 2020: Head of Senate Nazarbayeva publicly makes thinly-veiled criticisms of the government's handling of the economic crisis.

(3) 15 April: Constitutional Council discloses it is considering a petition submitted by Head of Senate Nazarbayeva for clarity on the sovereign powers conferred on parliament (presumably, as opposed to the president) by the constitution.

(4) 9-21 October 2019: President Tokayev concedes the power of veto over all senior government and security agency appointments (except the ministerial heads of defence, foreign affairs, and internal affairs), to former President Nazarbayev (now head of the Security Council).

Managed it was

In March 2019, after almost three decades of rule under Nazarbayev, within a notionally democratic political system where he dominated all elections and executive power, Tokayev was seemingly appointed as a hand-picked successor for president, while Nazarbayev retained significant powers behind the scenes and his daughter was elected to the leadership of the Senate, a role that could facilitate her ultimate succession. 

In other words, it appeared that a balance had been achieved between the following factors:

(1) Mitigate the risk of disorderly succession should Nazarbayev's health fail;

(2) Allow space for the more proactive style of Tokayev to implement reform and maintain social cohesion; yet 

(3) Retain powers within the Nazarbayev family, with Nazarbayev as an "eminence grise" and Nazarbayeva a next-generation, dynastic succession candidate).

Kazakhstan succession triangle personalities

Kazakhstan investment case

Kazakhstan has been one of our favourite oil-exporter equity markets for the following reasons:

(1) FX rate risk for equity investors is relatively low – external debt to GDP is about 85% and the current account deficit will average 6% over 2020-21, according to IMF forecasts. But almost all external debt is long-term, sovereign wealth (albeit much of it is not liquid) almost offsets all external debt (using data from Bloomberg and SWI), FX reserves import cover is 4 months, the real effective exchange rate is 5% below the 10-year median. Furthermore, for equity investors, the largest stocks (Halyk Bank, KazAtomProm the uranium producer, and Kaz Minerals) trade on the London Stock Exchange (which means that the sort of trapped capital risks which afflict Nigeria are much less applicable in Kazakhstan).

(2) Supportive geopolitics – Kazakhstan is a rare example in small emerging markets of a country which enjoys constructive relations with the US, China, Russia and the EU.

(3) Structural repair and reform – following the 2015-16 FX crisis, legacy problem assets in the banking sector have been worked through, fiscal deficits turned to surpluses, sovereign wealth buffers have been rebuilt, inflation targeting and FX flexibility has been introduced (eg KZT has depreciated 10% ytd, a release valve not available to the GCC), a privatisation programme (albeit with delays) is underway, and Kazakhstan is an important piece in China's BRI build-out of supply-chain infrastructure.

(4) Domestic politics orderly (until recently) – the managed succession of 2019 appeared to reduce risks around political transition, but recent events now call this part of the investment case into question.

Oil price fall pressures fiscal budget but from a balanced starting point, with sovereign wealth buffer (75% of GDP), and flexible FX rate release valve (unlike GCC, Nigeria)

Performance and valuation of equities (Halyk Bank GDR trades US$1.4m per day) and US$ sovereign bonds

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