At present Pakistan is plagued by policy paralysis and the situation is likely to get worse before getting better. The continuation of the IMF program remains critical. Unfortunately, analysts do not see much of an improvement. Pakistan seems to be caught in the midst of a perfect storm of adversities with spiraling inflation, falling reserves and external vulnerabilities.
Politics appears to be a nightmare because the current set up seems incapable of making the right decisions. The logjam in politics continues to persist, which is prolonging policy inaction, delaying the 9th IMF review and taking the situation from bad to worse.
Given the urgent need for action to revive the IMF program and procure fresh bilateral funding, the possibility of a technocrat-led government has made its way into the discourse. Such a setup would need very strong backing and slack by political parties, which appears to be missing.
Balance of Payments crisis is getting worse. Pakistan barely managed to meet the US$ one billion Sukuk maturity in early December 2022, but confidence on meeting external debt obligations in 2023 is being shattered with foreign exchange reserves slipping below US$ 6 billion.
There is little conviction also that the donors conference scheduled for January 09, 2023 in Geneva will generate meaningful funds for post-flood reconstruction.
Pakistan urgently needs the promised US$3 billion from Saudi Arabia, together with the continuation of the IMF program.
The situation has already become unsustainable and analysts expect the PKR to slip further down.
They also expect the policy rate to rise by another 100bps to 17% in the next Monetary Policy Committee meeting scheduled for January 23, 2023.
Prime Minister Shehbaz Sharif has indicated there is no option but to comply with IMF conditions (market-based exchange rate, energy reforms, higher revenue generation), but the government needs to take immediate action.
It appears that the Government of Pakistan (GoP) does not have an economic plan. Uncertainty kills, and unfortunately in this scenario, the market is the headless chicken that one really can’t put a target on. Events which will likely shape market direction in the year ahead include: 1) Re-entry into the IMF fold, 2) subsequent support from multilaterals and bi-laterals and 3) Elections 2023.
With regards to the former, delays in the 9th review will only aggravate uncertainty where parallels with Asad Umar’s tenure (similar delay in IMF restart) makes for an uneasy reading – market fell from 42,000 in August 2018 to 36,800 during tenure, with further decline till entry into IMF. The announcement of elections may potentially lead to a relief rally. That said, any subsequent government needs to come with a heavy mandate in order to carry out economic reforms.
Politics aside, economic developments will continue to hog limelight.
Pakistan’s external position has again depicted vulnerability where despite a relatively controlled current account deficit under the new regime (US$3.1 billion in 5MFY23 as against US$7.2 billion in 5MFY22, US$23 billion in debt maturity in FY23 amid dwindling foreign exchange reserves (US$5.8 billion as on December 29 2022) has rung alarm bells.
With reserve build-up unlikely to happen (matching or close to matching inflow and outflow of foreign exchange even as per State Bank of Pakistan (SBP) in FY23, analysts believe weakness in the PKR is a theme likely to continue into the new year. At the same time, GDP growth in FY23 is expected to slow to 2.1 per cent, driven by high base effects, flood related damages and disruptions, high inflation and less conducive global environment.
With average 5MFY23 headline CPI at 25.14 per cent and full year expectations at 24.9 per cent, core inflation (trimmed) in November 20222 at 19.8 per cent (Urban) and 25.4 per cent (Rural), and the urgent need to get IMF on board; analysts foresee further rate hikes in the days ahead. In this regard, the economist expects the policy rate to settle at 18% with no easing expected in CY23. That said, from 2HCY22, we do foresee inflationary pressures easing off, primarily due to high base effect.
Given the current precarious foreign exchange reserves situation and the entailing unofficial import restrictions, analysts believe cyclicals should most certainly be avoided. There are only two themes to play for in CY23: 1) US$ based revenue streams and 2) dividend yield. On the former, the Tech sector is the obvious choice where SYS and AVN are top plays. E&P is another sector with US$ based streams (albeit partially delayed) where preferred plays are MARI and POL. Given focus on circular debt (stock and flow), OGDC and PPL may continue to stay in the limelight if respective TFC and T-bill transactions are carried out.
If forced to choose, other top picks would include dividend plays where preferred plays include FFC, EFERT and MCB. Their one exception to the yield thesis is MEBL and to an extent FABL where they foresee continued strong deposit growth and higher interest margins.