Macro Analysis /

Pakistan Strategy - Inflection point

  • The KSE100 fell by an eye-watering 17% in US$ terms, as the PKR came under intense pressure in July

  • Respite is near, with the IMF staff-level agreement already in hand and Executive Board meeting set for August 25th

  • Charged politics not disruptive enough to prevent IMF programme resumption. Equities may have turned the corner

Raza Jafri
Raza Jafri

Executive Director, Research

Intermarket Securities
29 July 2022

And we thought June was bad

Investor sentiment fell through the floor in July, with heightened political noise overpowering the key milestone of the IMF staff-level agreement. The KSE100 Index shed 3% in PKR but an eye watering 17% in US$ terms, as the currency came in for a run amidst palpable fears of a default on international obligations. Turnover collapsed and local mutual funds saw redemptions, but foreign corporates encouragingly turned net buyers for the first time since January. Pakistan equities offer outsized return potential through the cycle, but we caution that sentiment may remain weak until foreign assistance materializes, whether from the IMF or GCC countries.

Watch PKR, IMF and Politics

Imran Khan claws back lost ground

An eventful July saw the PTI/PM-Q alliance wrest back control of Punjab. This was made possible by PTI winning 15 of the 20 vacant seats in the Punjab by-elections, giving it the numbers to elect the Chief Minister. High inflation and weak candidate selection were seen to work against the PML-N at the ballot. While the PML-N led government at the Center has vowed to complete its term, the loss of the powerful Punjab province leaves it considerably weaker, prompting louder calls for early general elections.  

IMF recess comes at an inopportune time

The charged political environment cut short the relief from the IMF staff-level agreement and sparked a run on the currency, exacerbated by Fitch and S&P turning negative on Pakistan’s credit-rating outlook. There is time till the next international bond maturity in December, but the need for funds is felt more urgently, if only to calm down markets in the immediate-term. The IMF’s Executive Board takes up Pakistan’s request on August 25th, and while Pakistan has reportedly requested early tranche disbursement, the IMF’s 3-week recess is in the way. This delay may accelerate efforts to secure support from Saudi Arabia (enhanced deferred oil facility) and the UAE (stakes in Pakistani state-owned entities). Pakistan has already pushed through an ordinance to hasten the divestment process.   

Key macroeconomic prints to slip before improvement comes

The JPM REER is near 80, indicating significant fundamental room for the PKR to appreciate, potentially back to the 210-215 level seen prior to the Punjab by-elections. Although the current account deficit for June was an ugly US$2.3bn, bringing the FY22 print to US$17.4bn (4.6% of GDP), authorities have guided for significant improvement from July. Inflation is expected to remain elevated across the next few months but incremental interest rate increases, if any, may be more modest compared to the sharp tightening thus far in 2022. July saw the SBP raising the benchmark Policy Rate by 125bps to 15.0%. Secondary yields in the recent T-bill auction have remained firm in the 15.75-15.94% range.  

Equities may already have turned the corner

Although all major international credit ratings agencies have turned negative on Pakistan’s credit-rating outlook, they have stated that the IMF will likely disburse the US$1.2bn tranche. August may thus see Fx reserves bottom out and start to rebuild. It is possible that an inflection point for Pakistan equities has already occurred, as the market anticipates this reserves buildup, but we would continue to be watchful of the PKR’s behavior. We reiterate that valuations are very attractive and that there is significant return potential through the cycle. Our top picks remain unchanged. In results out so far, BAFL has demonstrated very strong net interest income while giving a positive surprise on payouts. EFERT has skipped its dividend but this appears to be a temporary blip due to one-off high taxation. Expect normal service to resume from 3QCY22 onwards.