The PTI has retained 15 of the 20 seats for which by-elections were held yesterday in Punjab, and the PML-N has accepted the results. This should allow PTI and allied PML-Q to wrest back control of Pakistan’s largest province. Biting inflation has seemingly hurt PML-N’s popularity, and the ruling party will now potentially have to contend with a fractious relationship between the Center and Punjab. This could encourage populist decision making, which may imperil fiscal discipline and weaken adherence to the IMF progamme. That said, the by-election results increase the possibility of early general elections as the PML-N may choose to cut its losses, with a caretaker government to navigate the fragile economic landscape in this scenario. A galvanized Imran Khan has already reiterated his call for general elections. A government with a clearer, fresh mandate may arguably be better for reforms and Pakistan’s investment case.
PTI demonstrates its popularity; high inflation hurts PML-N
The PTI’s ouster at the Center a few months ago was matched by its government being toppled in Punjab as well. Unlike the National Assembly where PTI’s allied parties deserted it, Punjab saw PTI dissidents switch allegiance to PML-N, enabling Hamza Shehbaz (Prime Minister Shehbaz Sharifs son) to become Chief Minister. Courts later ruled that voting across party lines was not legal in such instances, disqualified the PTI dissidents, and ordered fresh elections on their vacant seats. PTI has now won 15 of these 20 seats. This should allow PTI and PML-Q to regain a majority in Punjab. Incumbent Hamza Shehbaz now has to decide whether to dissolve the Punjab assembly altogether or futilely go through the CM election process again.
Outlook: Greater chances of early elections
The Punjab by-election results heap pressure on the PML-N, back it into a corner, and strengthen Imran Khan’s narrative that his government was unfairly dismissed. The PML-N led government at the Center may yet see out its term until 2H 2023, in which case we believe populist decision-making is likely, which could extend the stop-start nature of the IMF programme. This would be risky considering Fx reserves stand at less than US$10bn and the import cover is just c 1.5 months. Alternatively, given the tough economic environment punctuated by 20%+ inflation, the PML-N may not risk a further hit to its popularity, and may opt for new general elections. A new government with a clearer, fresh mandate will likely be better placed to conduct reforms, which would ultimately be better for Pakistan’s investment case. We believe the chances of early general elections have increased.
Equities: Short-term uncertainty but long-term positives
The KSE100 gained a muted 1.8% last week, despite the staff-level agreement with the IMF. Investors may continue to remain circumspect as political noise is set to rise while the economy is still fragile. While we understand this reticence in the short-term, we believe much of the risks are priced in already, with forward P/E of 4.4x at a steep c.45% discount to the last 5yr average. If early elections are indeed held, possibly this year, Pakistan’s derailed reforms theme could yet get back on track. We retain our constructive medium-term outlook on Pakistan equities. Preferred stocks are MEBL, UBL, EFERT, SYS, LUCK and ILP.