February 11, 2022 (MLN): Pakistan’s capital markets are behaving erratically. Despite record earnings, the KSE100 index has stalled, showing no signs of exuberance. Year-to-date, as of February 11, 2022, the benchmark KSE100 index has gained merely 3.01%. The stock market has returned nothing to its investors in the last 12 months.
Some will argue that the market’s pessimistic behaviour is not entirely unfounded. Multi-year high oil prices, widening external account deficits, International Monetary Fund dictations and soaring food prices (inflation) have forced the market to remain timid over the last six months. But everyone already knows that. And to some extent, investors have already priced most of these factors in. However, the market still refuses to budge.
Reading through the communication released by the State Bank of Pakistan (SBP), the worst is behind us. The monetary tightening has been paused on hopes of fiscal policies reigning in aggregate demand. The outlook for the current account deficit has already been tapered down as the commodity cycle is expected to peak at current levels. Year-on-year inflation readings are also expected to come down from here onwards due to the high base effect and better agriculture production outlooks. External financing needs have also been sorted beyond FY22.
Despite all this, the market feels like it is in a state of coma. Nothing seems to excite it.
Good earnings? Check! Stable macroeconomic outlook? Check! Then what exactly is stopping the market from lift-off?
Maybe the market is looking for triggers elsewhere and it isn’t finding those. And the messaging from senior leadership at the helm of finance ministry and the State Bank of Pakistan has been poor to say the least.
Ask any investor about what’s bothering them and they’ll say that they don’t have clarity on what the government plans to do. And you can’t blame them either. The whole saga of meeting the prior conditions of the IMF tell a sorry tale of confusing communication. As the market was shocked by the Supplementary Finance Bill, investors were left wondering which sectors were going to be affected by the removal of sales tax exemptions.
The confusion didn’t end with the signing of the IMF programme. News of another supplementary bill started making rounds. This time around the sectors under the spotlight are fertilizers, pesticides and tractors. Meanwhile, the conditions laid out in the IMF document for the government before the upcoming review in September 2022 caused further distress. Meanwhile, the conditions attached to the resolution of circular debt management i.e., increase in base tariffs reignited fears of another round of high inflation.
After long negotiations and back and forth between IMF and the government, the country still really does not know what the government has promised to fund officials and what are the agreed timelines for some of the conditionalities.
While all of these reports unfold, investors are on their toes. Despite doing a laudable job on multiple fronts, i.e., rising base tariffs, ensuring independent central bank, harmonizing general sales tax, over-achieving tax revenue targets, containing fiscal deficit and securing adequate external financing to meet FX needs, the government has failed to instill confidence among investors.
This has been partly due to the ongoing lateral friction between the Finance Ministry and the central bank. Mr Tarin has repeatedly issued statements opposing the central bank’s views. Just look at the whole T-bill fiasco for instance. The Competition Commission of Pakistan (CCP) has started an investigation against banks over suspicions of collusion in the T-Bill auction held during December.
Although much can be said about Pakistan’s commercial banks and their love for government securities, the SBP must share part of the blame for the rise in yields. Meanwhile, the Ministry of Finance also needs to keep in mind that the central bank only works as a facilitator for government securities’ auctions but the final stamp of approval on bids accepted comes from the MoF itself.
The government’s loud baritone of calling everyone a mafia is now being adopted by the finance ministry as well. Before initiating an investigation against commercial banks, it would suit the SBP and MoF to look inwards and understand the communication failure that misguided the market participants.
All in all, the market has reacted to all of these developments by yielding a return of 3% in 12 months. That in itself speaks volumes about how the capital markets rate the government’s action.
Even though international commodity prices and market behaviour is out of SBP and MoF’s control, effective communication can go a long way to instill much-needed confidence amongst investors to reap the rewards of economic stabilization from the market.
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