January 12, 2021 (MLN): Although the country is not yet completely out of the woods, it is expected that the positive momentum will continue in the year 2021.
Recovery in industrial activity to pre-covid levels and rebound in consumption patterns should help the market sustain its uptrend in 2021. Furthermore, key macroeconomic variables are also supportive as Current Account has turned into a surplus, Pak Rupee outlook is stable, inflationary pressures are easing, and Discount Rate is expected to stay in single digits.
While keeping this optimism intact, a report by Alfalah Securities forecasted the benchmark KSE-100 is expected to reach 53,600 points by Dec-21 end, a potential upside of 21% from current levels, largely on the back of four major triggers that will likely be supportive for Pakistan’s equity market in 2021.
Market Driver No.01: Start of the Vaccination drive
The start of the vaccination drive is one of the key triggers for the market in 2021. According to news reports, govt. has allocated an initial amount of USD100 million for securing the vaccine and has pre-booked 1.2 million vaccine doses from the Chinese state-owned company ‘Sinopharm’. According to the govt. Pakistan will begin vaccinations in 1QCY21. In the first phase, the medical staff and people over the age of 65 will be administered with the vaccine. Note that Pakistan had participated in the stage three trials of Chinese vaccines, in which around 18,000 volunteers were administered vaccine doses.in addition to this, Pakistan is also planning to secure vaccine from Western pharmaceutical companies and has approved $250 million in funding to buy COVID-19 vaccines, and also signed non-disclosure agreements with various multinational companies.
Market Driver No. 2: Revival of stalled IMF program
Pakistan is slowly moving towards the resumption of the suspended IMF program. Recently, Dr. Reza Baqir, Governor State Bank of Pakistan (SBP) in an interview at the Reuters Next conference said that Pakistan is in talks with the International Monetary Fund (IMF) to put the fiscal support programme back on track, as he is optimistic about the economic outlook despite the fallout from the coronavirus pandemic. Furthermore, media reports suggest that Pakistan now has agreed to increase power tariffs and abolish corporate tax concessions of around Rs 200 billion and IMF too has agreed to give some leeway due to the second wave of Covid-19.
This move will lead the market in the right direction as it will recuperate investor interest and multilateral confidence and restart the economic reform process, a report by Alfalah Securities said.
Market Driver No. 3: Circular debt settlement
As the Independent Power Producers (IPPS) and the government have in principle come to an agreement over payment terms of the outstanding circular debt as per which government will clear all overdue receivables of the power sector in three equal installments, one of them being at the signing of the new PPAs and the rest in two semi-annual installments. Each of the installments will comprise 1/3 cash and 2/3 PIBs.
The settlement proposal is a result of a change in variables of the original PPAs. 1994 and 2002 IPPs will be the prime beneficiaries of the settlement as they were the ones bearing the brunt of the rising receivables, the report cited.
It further stated that KAPCO and PKGP will be the biggest beneficiaries while HUBC being the least. PSO will also benefit from the settlement, though indirectly, with money flowing through the IPPs to the fuel supplier. Out of the total, the report highlighted that 20% of each installment will be passed on to PSO, translating into Rs 30 billion per installment against total reported receivables of around Rs 195 billion.
PSO will utilize the proceeds to either reduce the borrowings or its payable exposure to shield itself from adverse currency moves. In either case, the proceeds will assist in reducing its earnings volatility and improve cash conversion thereby reducing its valuation discounts.
With regards to E&s, the report underscored that E&P’s will get little to nothing from the settlement agreement as they have limited direct exposure to the power value chain. Thereby, the status quo will continue for the E&P’s in regard to piling up of receivables unless the government makes a targeted settlement for them.
Market Driver No. 4: Lower political risk
The joint opposition under the banner of the Pakistan Democratic Movement (PDM) has started a movement to oust the sitting government. The alliance has been carrying on rallies in all major cities of the country. The opposition is threatening to resign from parliament to put the government under pressure.
So far, the PDM has had little success in pressurizing the government. The PPP (one of the larger opposition parties) has been reluctant to resign. The decision makes sense as PPP would be the biggest loser as it forms its government in Sindh. Thus, the PPP’s decision to run for by-polls and senate elections further cemented a view of a much calmer political climate in 2021, the report said.
Looking ahead, all these triggers will support the market to sustain its current uptrend in 2021.
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