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Capital Market Analysis: Pakistan’s four-year breakthrough and ongoing future investment

Pakistan had successfully tapped international capital market four times since 2014 and each time received overwhelming response. This is termed the event an excellent way of showcasing rich cultural diversity and abundant opportunities, a growing and developing Pakistan offered to young entrepreneurs. In 2013, the country was facing challenges of unstable macro-economic situation, GDP growth at only 3 percent, foreign reserves of below US$8 billion, spiraling circular debt, crippling energy shortages and fiscal deficit of 8.8 percent.

The government set priorities right by focusing on 4 Es including Energy, Economy, Elimination of extremism, and Education. The country is now backing on the road to macro-economic stability to achieve higher, sustainable and inclusive growth.

For the first time, Pakistan successfully completed all 12 reform steps of EFF (Extended Fund Facility) Program of the International Monetary Fund (IMF), asserting that growth momentum continued to remain above 4 percent for the third year in a row, and the GDP growth was registered 4.71 percent in fiscal year 2016, highest in eight years. Target for the GDP growth in fiscal year 2017 is around 5.5 percent and 7 percent during fiscal year 2018-19.

International organizations, had also recognized Pakistan’s economic turnaround, citing that the IMF had raised its GDP growth forecast for Pakistan for fiscal year 2017 from 4.7 to 5 percent, and projected GDP growth of 5.5 percent.

Asian Development Bank (ADB) raised its GDP forecast for 2017 from 4.8 to 5.2 percent, and the World Bank projected 5.2 percent GDP growth in fiscal year 2017 and 5.4 percent in FY 2018. The Economist also recently ranked Pakistan as the 5th fastest growing global economy as well as the fastest growing Muslim economy.

On the revenue side, tax collection increased by 60 percent over last three years and foreign reserves were sufficient for over five months of import cover.

PricewaterhouseCoopers (PwC) Report projected Pakistan’s economy to be the 20th largest by 2030 and the 16th largest economy by 2050, above Italy and Canada.

Pakistan had recently been moved up four places in the World Bank’s ‘Ease of Doing Business’ rankings and was also one of the top ten global improvers.

Support through bonds issuance

Pakistan raised $2.5 billion from global capital markets by issuing the five-year Sukuk (Islamic bond) and the 10-year Eurobond at relatively lower rates. Foreign investors are still confident about the country’s $300 billion economy.

The dollar-denominated Eurobond and Sukuk Al-Ijarah fetched the highest-ever amount for Pakistan in a single such attempt abroad. Pakistan got a better price and a better deal size despite difficult domestic situation.

The $2.5 billion injection would provide a piece of mind to the government which is unwilling to go back to the International Monetary Fund (IMF) ahead of the next general elections.

Government anticipated raising only $1.5 billion through Eurobonds, Sukuk issuance. The excessive liquidity in the international market and low-interest environment also helped the government strike a better deal.

Pakistan got around $8 billion offers for both Sukuk and Eurobond, allowing the country to get the best deal. There were fears that investors might strike a higher price because of the prevailing political uncertainty and the country’s huge financing needs.

The deal was signed off at rates which were even lower than indicative rates Pakistan offered to global investors. Pakistan offered the 10-year Eurobond bond in the low 7 percent range and the 5-year Sukuk at an initial price tag of 6 percent.

The government raised $1 billion through the 5-year Sukuk at the rate of 5.625 percent, which near lowest-ever rate of 5.5 percent that Pakistan paid in September last year. The rest of $1.5 billion were generated through the 10-year Eurobond at a fixed rate of 6.875 percent, which is 455 basis points above the corresponding 10-year US Treasury benchmark rate, matching the lowest-ever rate of 6.875 percent that Pakistan paid in 2007 on its 10-year Eurobond. The government put off its plan to issue a 30-year Eurobond after a gap of 12 years, encountering difficulties at fetching a better price.

The Third Pakistan International Sukuk Company issued the Sukuk Al-Ijarah, pledging a section of Pakistan Motorways as collateral. Both the bonds will be listed at the Luxembourg Stock Exchange under the US Regulations.

Pakistan is forced to exploit global debt markets after the federal government failed to ensure sufficient non-debt creating inflows. Domestic exports declined 25 percent over the past four years, standing at mere $20.4 billion, or just 6.7 percent of the $304 billion national economy. Foreign direct investments also remained very low.

In order to meet foreign exchange requirements, the government has so far raised a high $13.7 billion by floating bonds and obtaining commercial loans over the past four and a half years.

These include $6.64 billion expensive foreign commercial loans and $7 billion Sukuk and Eurobond notes, including the fresh deal. The consortiums of banks hired for the transactions had indicated that the 5-year Sukuk, the 10-year Eurobond and another 30-year Eurobond with combined proceeds of between $2 and $3 billion could be floated.


Pakistan went to the international debt markets to bolster the central bank’s fast depleting foreign exchange reserves. Earlier, the government borrowed $2 billion in 2014 through similar capital market transactions.

The State Bank official foreign currency reserves declined to $13.54 billion because of mounting trade and debt-related payments. The domestic current account deficit widened to more than $5 billion in the July-October period of the ongoing fiscal year higher by almost 122 percent in comparison with the same period during the previous fiscal year.

The federal cabinet allowed borrowing of $2 billion to $3 billion from international debt markets by floating sovereign bonds, waiving a dozen taxes to make deals more attractive for investors.

A consortium, comprising the Standard Chartered Bank, Industrial and Commercial Bank of China, Citibank, Deutsche Bank, Dubai Islamic Bank and Noor Bank handled the Sukuk transaction. The Standard Chartered Bank, Industrial and Commercial Bank of China, Citibank and Deutsche Bank was lead managers for the Eurobond issue.

High price over Panama issue

Pakistan stock market has paid a heavy price on the Panama issue as the PSX lost Rs859 billion in only 30 trading sessions after the Supreme Court’s verdict of July 28, 2017 to disqualify Nawaz Sharif from the post of Prime Minister of Pakistan.

The loss amounts to almost Rs1, 800 billion if compared to the highest market capitalization of Rs10 trillion as on May 24, 2017.

Arif Habib — a stock market expert and a leading businessman has confirmed that prime minister’s disqualification is one of the prime factors for the downfall of stock market. He claims the stock market has lost almost Rs2,000 billion compared to the highest market capitalization on May 24, 2017.

In addition to the disqualification of Nawaz Sharif, he also attributed the decrease in the market capitalization to factors including the trade deficit, market unfriendly budget and risk of devaluation of the currency. An analysis of the stock market data available at the PSX website shows that a total of Rs951 billion ($9 billion) has been wiped out from the market since the date of the first decision of the five-member bench on April 20, 2017 till September 12, 2017.

Most notably, Rs859 billion ($8 billion) i.e. 90 percent of the total loss has been incurred in only “thirty trading days” after the decision of the apex court of July 28, 2017 that disqualified Nawaz Sharif as Prime Minister of Pakistan.

Foreign selling amount

The total foreign selling observed at Pakistan Stock Exchange after April 20, 2017 till September 12, 2017 amounts to Rs28.5 billion. The information available at National Clearing Company of Pakistan Limited (NCCPL) website shows that Rs11.4 billion i.e. 60 percent of the total selling by foreigners during the period was witnessed after the July 28 decision of the apex court. On the other hand, during the same period of last year the foreign inflow of Rs2.5 billion at PSX was observed.

It is important to mention here that from April 20, 2017 to September 12, 2017, KSE-100 Index has registered a total decrease of 7464 points (48,743; April 20, 2017 and 41,279: September 12, 2017) i.e. 15 percent. Notably, 38 percent of this total decrease has been registered after the decision of the apex court of July 28, 2017.

The highest-ever KSE-100 Index was reported on May 24, 2017 at the level of 52,876. For the period April 20, 2017 to September 12, 2017, the average traded volume and value on PSX have decreased drastically which reflects loss of investor’s confidence. The average volume of shares traded per day at PSX was 269 million. However, after the decision of the apex court on July 28, 2017, the average volume decreased by 30 percent to 190 million shares. Similarly, the average traded value decreased by 32 percent from Rs14.578 billion (average for April 20, 2017 to September 12, 2017 to Rs9.8 billion (average for May 28, 2017 to September 12, 2017).

The loss not only affected the investors including pension and mutual funds policy holders where people invest for retirement planning etc but the sluggish market activity has adversely affected the amount of tax deposited in the national exchequer.

Arif Habib further said the stock market cap touched the highest point of around $100 billion on May 24, 2017 and right now it has faced a 20 percent downfall which means $20 billion loss to the market. The decline of stock market started actually from the fiscal budget as it was not market-friendly. The market was expecting net inflows from foreign investors but unfortunately it happened quite opposite to it. However, he said the political transition has started getting smooth and the market has started regaining the investors’ trust which is evident from the export numbers of August.

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