ISLAMABAD – In a positive development, Pakistan Economy shows signs ofrecovery and turnaround.
Swiss financial firm Credit Suisse in its latest report “Pakistan: On thepath to recovery” has stated that Pakistan’s fundamentals have “improvedsignificantly” in the wake of IMF assistance, fiscal consolidation, andmuch-needed reforms.
However, the firm warned that challenges lie ahead.
The Zurich-based firm stated:
Near term, we expect equities to remain range-bound after a strong rally,but the long-term upside potential remains significant.
It noted that the Rupee has stabilized, and there is potential for modestappreciation in USD rates, as they believe the carry trade offers acompelling risk/reward opportunity and recommend short duration t-bills.
The firm noted that the currency has stabilized after a lengthy period ofdepreciation and foreign investors have started to take notice, withportfolio inflows sharply accelerating over the past six months. Despitethe economic and geopolitical risks, and the long list of reforms stillneeded, the short-term outlook is stable and the medium-term outlook isimproving.Inflation Yet to Ease
The firm noted that one of the factors that have weighed on domestic demandhas been the soaring levels of inflation, driven by the 50% currencydevaluation over two years and rising food prices.
There are early signs of stabilization in headline inflation readings,though it is too early to confirm, maintained the firm. Nevertheless, itexpects to see inflation easing over the second half of 2020.Central Bank Likely to Keep Rates Unchanged
The reverse repo rate has risen dramatically from its lows of 6.25% inDecember 2017 to 13.75% in July 2019 as the State Bank of Pakistan (SBP)fought to rein in inflation, maintained Credit Suisse.
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In doing so, the central bank also fulfilled the policy actions required bythe IMF. Rates have been held steady since then and they do not see furtherrate increases on the horizon. With inflation remaining elevated, it seemstoo early for a rate cut and the Credit Suisse believes that the SBP willmost likely await firm signs of disinflation before doing so. In addition,real rates remain low implying limited pressure for rates to be reduced inthe near term.PKR Could See Modest Appreciation
Credit Suisse expects Pakistani Rupee to remain stable going forward,supported by Pakistan’s commitment to the EFF program. So far, the IMF’sassessment of Pakistan’s progress has been positive and on track.
A continuation and improvement in this trend could support a modestovershoot on the REER. Credit Suisse noted that a move in the REER back to105 (in line with levels seen prior to 2014) would correspond to a further2%–4% appreciation in the PKR, according to their estimates.Current account deficit has narrowed substantially
The sizable devaluation in the currency has driven a marked recovery in thetrade balance, which has nearly halved from a $3 billion deficit to $1.5billion in close to 18 months. This has been driven by a sharp 40%peak-to-trough decline in imports and a modest improvement in exports.
The firm noted that the funding of the deficit relies heavily oninternational donors and lenders (as would be expected) and alsoincorporates an aggressive increase in foreign direct investment (FDI).These projections are not necessarily unrealistic: in absolute terms, theIMF looks for FDI to recover and exceed FY 2017–18 levels in two years andreach the 2008 peak in two years. Nevertheless, if it fails to materializeit poses a risk to the funding forecast.Equities Likely to Remain Range-Bound in Short Term
The firm stated that the index is consolidating the recent substantivegains. Given the scale of the rally and the subsequent normalization inexchange rates, it expects the index to remain range-bound near term.
However, on a 12-month horizon, they see significant scope for furtherupside supported by earnings upgrades and cheap valuations. There isadditional support from the attractive 6.4% forward dividend yield.
