Macro Analysis /

Pakistan: Uncertain politics but economic outlook is clearer

  • Continued monetary tightening and delays in implementing the IMF's preconditions marred December performance.

  • The resumption of the IMF programme is a near certainty, and can trigger rerating. Foreign selling appears to be over.

  • Politics poses risks, with inflation cutting into the PTI's popularity, but risks are priced in going by the < 5x PE.

Raza Jafri
Raza Jafri

Executive Director, Research

Intermarket Securities
31 December 2021

Weak macros and indecision mar December

The KSE-100 came near its CYTD low of 42,779 pts in December as interest rates continued to increase, and the Index eventually closed the month with a 1.1% decline (down 1.5% in US$ terms), to bring a disappointing end to 2021. December’s performance was affected by the government’s delay in completing the IMF’s preconditions, with indecision coming through after the PTI’s surprise local body elections loss in its Khyber Pakhtunkhwa stronghold. Wait-and-see mode prevailed, captured by the insipid daily turnover of c. US$70mn, easily the lowest for the year and much below the 2021 average of c. US$160mn. However, in what may be revelatory for 2022, foreign institutional selling significantly reduced following Pakistan’s reclassification to MSCI FM. Looking ahead, we reiterate that the resumption of the IMF programme is a near certainty, which can lead to a healthy bounce in January. In this, we are encouraged by data support for the January effect in Pakistan (+ c. 4% gain on average).      

Watch IMF programme, macro prints & politics  

The IMF programme is near

December kicked off on a weak note, with CPI rising to 11.5% (pre-Covid levels) and the trade deficit widening to a record high. As a result, the SBP increased the policy rate by 100bps to 9.75%, bringing the cumulative rate hike since September to 275bps. In tandem, the central bank guided for a pause in the rate hike cycle come the January MPS, and intervened in the money markets to bring down treasury yields. However, higher global commodity prices pose a challenge, and near-term pressure on inflation and the current account underscore the imminent need for the IMF programme. This is close at hand. Pakistan took its time on the remaining prior actions but both the SBP Act, which grants the central bank more autonomy, and a “mini budget”, which removes tax anomalies, have been presented in Parliament and should go through. The IMF’s Executive Board takes up Pakistan’s request for programme resumption in January, and approval should be a formality, in our view.  

PTI has lost some political capital but the reforms push is deep rooted

The government is sticking to its reform agenda, but high inflation is cutting into its popularity and possibly led to the PTI’s loss in the first phase of the local body polls in Khyber Pakhtunkhwa, its stronghold since 2013. Voters tilted to the JUI-F, whose leader Maulana Fazl-ur-Rehman also heads the opposition alliance. For the PTI, this loss is at best a wakeup call, and at worst signals deep anti-incumbency come the 2023 General Elections. We expect politics to remain uncertain in the coming year, but argue that the cheap valuations (2022f P/E: 4.9x vs. long-term average of 8.5x) make for an attractive risk-reward. There are also signs that Pakistan’s commitment to reforms is now more deep rooted. In this regard, the Cabinet has recently approved the first National Security Policy (2022-26), which incorporates input from the armed forces, and reportedly has economic security at its core.

IMF programme resumption can trigger the January effect

Our 2022 strategy report eyes a Dec’22 Index target of 53,000pts, offering upside of c 20%, and a good chunk of this should be realized in January in our view. Since its inception, the KSE-100 has risen 20 out of 30 times in the first month of the year and gained c 4%mom on average, pushing forth the case for the January effect being in play. The expected resumption of the IMF programme can trigger better performance at the start of 2022, by extending comfort over macroeconomic outlook. Flows should also be supportive, as foreign institutional selling is now seemingly behind us (FI ownership is now near trough 2009 levels), while locals have ample room to rotate into equities. For our top 10 picks, we replace HUBC with MTL. HUBC suffers in the absence of near-term triggers while the fears over increased GST on tractors have not materialized.