The elected government of PML-N completed its term, an interim setup put in place and general elections are scheduled for 25th July 2018. The interim government is not likely to take any strategic decision on the economic front because PML-N announced FY19 budget prior to its exit. The next elected government also may not be in a position to bring in any structural changes. While one can’t change the history, it does offer an opportunity to learn from past mistakes and take corrective steps. At times the wounds are very deep and may take months and years to heal, provided no further injuries are caused.
For a considerably long time Pakistan stock market has enjoyed the status of one of the best performing markets. The 2008 crisis was the impact of international turmoil but it was aggravated because of bad decisions of the apex regulators. Against this, the 2018 crisis was not caused by any external factor, but because of the bad policies of PML-N government. The party which gave the slogan of ‘breaking begging bowl’ emerged to be the biggest borrower in the history of Pakistan. Further insult was added as PML-N government refrained from approaching the lender of last resort, International Monetary Fund (IMF), but kept on borrowing from other sources at much higher interest rates. It may not be wrong to say that the next elected government will have no option but to approach the IMF. Keeping in view the precarious state of the economy, it can’t be rules out that the IMF may impose more stringent conditions. Before exploring the facets of the economic policies of the next elected government, a review of the performance of Pakistan stock market is necessary.
According to various reports of equity brokerage houses, political uncertainties had the most profound impact on Pakistan Stock Exchange (PSX). The factors impacting the market included: 1) country’s apex court declaring Nawaz Sharif ineligible to continue as party head while dismissing all political actions taken by him since 28th July 2018 in Panama case verdict, 2) TLP’s 21 day long sit-in the federal capital culminating in the resignation of the Law Minister, 3) inclusion of Pakistan in FATF’s watch-list and 4) announcement of tax amnesty scheme in April 2018 that was extended till 31st July 2018.
Economic concerns also came to the fore during the year with current account deficit (CAD) rising to US$15.9 billion in 11MFY18 due to the hike in crude oil prices, depreciation of PKR and interest rate hike by 75bps. These in combination with event based negativity in key sectors (imposition of fine on HBL, increase in minimum pension amount to PkR8,000 per month for bank retirees by the Supreme Court, imposition of windfall levy on certain licenses in Oil & Gas) and unabated foreign selling amounting to US$288.5 million in FY18, further marred index performance. Over the coming weeks, investors will be eagerly tracking the pre-election political developments looking for clues to determine the potential outcome. A wait and see approach is likely with the market expected to trade in a narrow band.
Mainstream board sectors failed to perform during the year where all with the exception of Oil & Gas Exploration (up 8.8%YoY on higher oil prices) closed in red. Cements lost the most, down by more than 41.3%MoM on weak fundamentals where rising input costs created pressure on margins. Automobiles sector was down 37.7%YoY on demand concerns arising out of anticipated competitive pressures, Electricity was down 20.3%MoM primarily on account of KEL and closure of FO based plants and textiles were down 7.2%YoY despite continued government support and currency depreciation. Commercial banks were down almost 11%YoY on account of unfavorable budgetary proposals (super tax continuation), regulatory challenges (additional capital requirements by SBP, increase in minimum pension rate to PkR8,000/month) and increased oversight on foreign operations.
One of the most contentious outcome under the prevailing political uncertainly was selling by foreigners amounting to nearly US$74 million in June 2018, taking total outflow during FY18 to US$288.6 million. Contrary to expectations, the transition to MSCI EM index failed to bring in additional inflows, on the contrary the highest net outflow was seen in Financials (US$155.9million), Oil & Gas Exploration (US$99.1million) and Cements (US$35.4million) sectors.
Coming to harsh realities, the economic indicators in general and fundamentals for listed companies are going from bad to worse. The country needs to boost its exports, but local manufacturers are unable to compete in the global markets due to high cost of production. Imports are likely to increase further with the hike in crude oil prices. Work on many of the infrastructure projects has been suspended or moving at snail’s speed, which is likely to adversely impact the local cement sale as well as its export due to eroding competitiveness of Pakistani manufacturers.
With general elections scheduled for 25th July 2018, political developments are likely to overshadow everything else going forward, playing a key role in shaping up investment decisions. Further volatility has been added by the verdict of accountability court announcing its verdict, imposing severe punishments and hefty fines on Nawaz Sharif (elected prime minister of Pakistan for the third time) and his family members. Some of the quarters have already expressing apprehensions that the general elections may not be held on the scheduled dates.