January 11, 2019 (MLN): Global economic crisis, mainly arising out of monetary policy tightening carried out by US Federal Reserve, as well as trade wars amongst leading economies, has paved way for numerous uncertainties for both developed and emerging equity markets. A report titled “It is the best of times, it is the worst of times” by Next Capital suggests that Pakistan has and continues to suffer from this global economic fiasco.
Persistently rising interest rates, depreciating rupee value and internationally declining oil prices took a toll on the capital markets, causing them to slip for the second year in a row. The local stock markets had welcomed the passing year (2018) at 40,471 points, around 15% lower than the beginning of 2017. Another year down the line, the index slipped further to 37,066 down by another 8.4%, YoY.
Moreover, overvaluation and then the subsequent devaluation of PKR prompted foreign investors to sell equities worth USD 1.5 billion in the past four years. The economy may endure further damage in case Pakistan gets dismissed by MSCI on account of inability to meet both of the criteria of number of companies and market capitalization.
However, Pakistan can still recuperate from the damage via interest rate stabilization and PKR/USD parity, along with implementation of key policy measures to tackle macroeconomic challenges, ensuring inflow of liquidity by foreign investors.
Speaking to Mettis Global news on the aforementioned likelihoods, Mr. Shahab from Next Capital said that the market is expected to remain volatile in the first half of 2019, however, it will pick up pace as soon as the deal with IMF is finalized, which is most likely to take place in the second half. He also maintained that if this development takes place, the index might go up to 44,500 points.
Regarding the economic outlook of the country in 2019, the report by Next Capital suggested that Pakistan’s high external dependency alongside monetary tightening and stagflation have strapped down aggregate demand, which is likely to take a toll on country’s GDP with an unearthly progression of 3.4%, as compared to last year’s 5.8%.
Pakistan’s external debt obligations are likely to ease out with the bilateral flows to arrive this year including USD 2 billion from China, USD 6 billion from Saudi Arabia and USD 3 billion from UAE. Additionally, three-year receipts worth USD 7.5 billion from ADB (USD 2.5 billion for CY19), Panda bond and diaspora issuance of USD500mn and USD3bn, respectively combined with private sector borrowing of USD 2.7 billion would ensure smooth sailing for FX reserves throughout FY19.
On a social political front, the chances of Pakistan being put on the black list by FATF appears to be minimal given the increasing friendliness between Pakistan and United States recently, and the measures taken by government to combat non-compliances on the money laundering and corruption fronts would eventually benefit by dipping the size of the grey economy.