Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Macroeconomics

Pakistan's external liquidity situation has improved markedly over the past year, after the IMF released US$1.386 billion under its RFI (Rapid Financing Instrument) in April 2020, and the ADB subsequently rapidly disbursed two loans totalling US$800 million. This 23rd IMF loan to Pakistan was separate from the already-existing EFF (Extended Fund Facility) worth US$6 billion that the IMF approved on 3 July 2019 (for 39 months). Pakistan received the latest US$500 million tranche of the EFF (taking total disbursements under this EFF to US$2 billion) in March 2021, and Pakistan issued US$2.5 billion in sovereign bonds soon afterwards. Consequently, foreign reserves (including gold) swelled to US$20.6 billion in March 2021 and US$22.6 billion in April 2021 -- providing over 3 months' import cover (although increasing by only US$2 billion in the month in which US$2.5 billion were raised in sovereign bonds).    Pakistan's public debt remains unsustainably high (92.8% of GDP in June 2020). After promising the IMF in March 2021 that taxes would be raised in order to bring the fiscal deficit down from 7.1% of GDP in FY2020/21 to 5.5% in FY2021/22, Pakistan's Budget for 2021/22 instead cut excise duties on a slew of products and raised no taxes. While the IMF was forecasting a 27% increase in tax revenue in FY2021/22, and the government forecasts a 17.5% YoY increase, the actual outcome will likely be no better than a 10% increase -- and the fiscal deficit will likely be closer to 7% rather than the 6.3% of GDP in the official Budget (and far above the 5.5% of GDP promised to the IMF). Pakistan's external debt has soared to 281.5% of exports of goods &amp; services in June 2021, up from 235% two years earlier. In FY2019/20 (the first year of the EFF), import compression helped reduce the current account deficit to 1.1% of GDP. But loose monetary policy led to a surge in inflation (averaging 9.9% YoY in Feb-June 2021) and a 33% YoY increase in the trade deficit in FY2020/21 (close to the level in FY2018/19), as imports rose 25.8% YoY -- much faster than the 18.2% YoY growth in exports. The current account deficit is thus likely to have risen to at least 3% of GDP. The policy rate was cut by 625bp between March and June 2020 to 7%, implying that the real policy has been -2.9% in Feb-Jun 2021 (and -1.9% for the whole of FY2020/21). Growing evidence of over-heating, at a time of looser fiscal policy, will oblige the SBP (State Bank of Pakistan) to raise interest rates by at least 100bp by end-2021. We would suggest being Underweight Pakistan equities, and would also urge caution regarding the spreads on Pakistani sovereign bonds.

Pakistan's external liquidity situation has improved markedly over the past year, after the IMF released US$1.386 billion under its RFI (Rapid Financing Instrument) in April 2020, and the ADB subsequently rapidly disbursed two loans totalling US$800 million. This 23rd IMF loan to Pakistan was separate from the already-existing EFF (Extended Fund Facility) worth US$6 billion that the IMF approved on 3 July 2019 (for 39 months). Pakistan received the latest US$500 million tranche of the EFF (taking total disbursements under this EFF to US$2 billion) in March 2021, and Pakistan issued US$2.5 billion in sovereign bonds soon afterwards. Consequently, foreign reserves (including gold) swelled to US$20.6 billion in March 2021 and US$22.6 billion in April 2021 -- providing over 3 months' import cover (although increasing by only US$2 billion in the month in which US$2.5 billion were raised in sovereign bonds).    Pakistan's public debt remains unsustainably high (92.8% of GDP in June 2020). After promising the IMF in March 2021 that taxes would be raised in order to bring the fiscal deficit down from 7.1% of GDP in FY2020/21 to 5.5% in FY2021/22, Pakistan's Budget for 2021/22 instead cut excise duties on a slew of products and raised no taxes. While the IMF was forecasting a 27% increase in tax revenue in FY2021/22, and the government forecasts a 17.5% YoY increase, the actual outcome will likely be no better than a 10% increase -- and the fiscal deficit will likely be closer to 7% rather than the 6.3% of GDP in the official Budget (and far above the 5.5% of GDP promised to the IMF). Pakistan's external debt has soared to 281.5% of exports of goods &amp; services in June 2021, up from 235% two years earlier. In FY2019/20 (the first year of the EFF), import compression helped reduce the current account deficit to 1.1% of GDP. But loose monetary policy led to a surge in inflation (averaging 9.9% YoY in Feb-June 2021) and a 33% YoY increase in the trade deficit in FY2020/21 (close to the level in FY2018/19), as imports rose 25.8% YoY -- much faster than the 18.2% YoY growth in exports. The current account deficit is thus likely to have risen to at least 3% of GDP. The policy rate was cut by 625bp between March and June 2020 to 7%, implying that the real policy has been -2.9% in Feb-Jun 2021 (and -1.9% for the whole of FY2020/21). Growing evidence of over-heating, at a time of looser fiscal policy, will oblige the SBP (State Bank of Pakistan) to raise interest rates by at least 100bp by end-2021. We would suggest being Underweight Pakistan equities, and would also urge caution regarding the spreads on Pakistani sovereign bonds. 

Pakistan: Public and External Debt Remain Unsustainable; Policy Tightening Ahead

Deputy Chief Economist

Sharmila Whelan

Independent and original Asian investment research

Aletheia Capital

Aletheia Capital (HK) Ltd. (previously known as Asianomics) combines the extensive knowledge of its experienced team with technology and regulatory changes to disrupt Global Markets business in Asia. The firm is completely independent with no conflicts of interest either on Investment Banking advisory or Capital Markets execution.

The coronavirus pandemic is behind Pakistan and economic activity is gradually  normalising. The government has spent PKR1.2trn in emergency fiscal support while Pakistan’s international creditors have agreed to reschedule external debt service payments and extend additional financial assistance in the interim. Meanwhile the central bank has cut interest rates by 625bp since March. It is early days. Corporate profits remain under pressure and credit demand, particularly for investment loans, is weakening. Nonetheless Pakistan should recover sooner rather than later.

The coronavirus pandemic is behind Pakistan and economic activity is gradually  normalising. The government has spent PKR1.2trn in emergency fiscal support while Pakistan’s international creditors have agreed to reschedule external debt service payments and extend additional financial assistance in the interim. Meanwhile the central bank has cut interest rates by 625bp since March. It is early days. Corporate profits remain under pressure and credit demand, particularly for investment loans, is weakening. Nonetheless Pakistan should recover sooner rather than later. 

While he Covid-19 pandemic rages on in India, her neighbour Pakistan has bought the outbreak under control with surprising speed and efficiency. The number of deaths and daily new cases are both trending down. While the economy will not escape the economic fallout of Covid-19 compared to India, Pakistan is better positioned for recovery and its long-term outlook thanks the China-Pakistan Economic Corridor is looking bright.

While he Covid-19 pandemic rages on in India, her neighbour Pakistan has bought the outbreak under control with surprising speed and efficiency. The number of deaths and daily new cases are both trending down. While the economy will not escape the economic fallout of Covid-19 compared to India, Pakistan is better positioned for recovery and its long-term outlook thanks the China-Pakistan Economic Corridor is looking bright.

We are bullish about Pakistan’s future even though the short-to-medium term economic outlook is clouded by the pandemic. Globally, the coronavirus pandemic is worsening and the number of cases in Pakistan is rising.  The IMF has just approved US$1.4bn worth of emergency funding. Pakistan will not escape the economic costs. The country is starting from a weak position. Last year’s twin-deficit crisis has left the economy enfeebled; GDP growth has slowed sharply led by domestic demand. Having said that, structural imbalances are correcting fast. Both the current account and budget deficits are narrowing. Fundamentals are healthy. Bank non-performing loan ratios remain low, capital adequacy ratios and profitability high. There is no large-scale corporate deleveraging underway. In the meantime, projects related to the China-Pakistan Economic Corridor (CPEC) are progressing rapidly and China-Pakistan cooperation is deepening.

We are bullish about Pakistan’s future even though the short-to-medium term economic outlook is clouded by the pandemic. Globally, the coronavirus pandemic is worsening and the number of cases in Pakistan is rising.  The IMF has just approved US$1.4bn worth of emergency funding. Pakistan will not escape the economic costs. The country is starting from a weak position. Last year’s twin-deficit crisis has left the economy enfeebled; GDP growth has slowed sharply led by domestic demand. Having said that, structural imbalances are correcting fast. Both the current account and budget deficits are narrowing. Fundamentals are healthy. Bank non-performing loan ratios remain low, capital adequacy ratios and profitability high. There is no large-scale corporate deleveraging underway. In the meantime, projects related to the China-Pakistan Economic Corridor (CPEC) are progressing rapidly and China-Pakistan cooperation is deepening. 

Pakistan has reached a staff-level agreement for a 3-year EFF (Extended Fund Facility) loan from the IMF amounting to US$ 6 billion. This will be Pakistan's 22nd loan from the IMF, and will entail further fiscal austerity (to bring the primary deficit down to 0.6% of GDP in FY2020 from 2.1% in FY2018), a "market-determined exchange rate" (likely implying further depreciation, if not a one-off devaluation), likely further increases in interest rates to reduce inflation, and increases in energy prices (as part of a "comprehensive plan for cost-recovery in the energy sectors and state-owned enterprises"). The IMF staff-level agreement terms make it clear that these are pre-conditions for the IMF  management and board to agree to begin disbursing the first tranche of the EFF, which was expected to be in the range of US$6-12 billion (but is now confirmed to be at the bottom of that expected range). The IMF statement implies that tough action is essential to address Pakistan's yawning twin deficits (a fiscal deficit of nearly 7% of GDP and a current account deficit of 6% of GDP for FY2019). The forthcoming budget for FY2020 will require a tightening of the tax code (including closing loopholes to boost revenue mobilisation) in order to credibly bring the fiscal deficit below 5% of GDP (and the primary deficit to 0.6% of GDP). Additionally, the PKR (having already depreciated 35% in the past 2 years without improving the CAD) will need to depreciate another 10% over the next half-year; to counter the resulting inflationary impact, we expect the SBP to raise the policy rate a further 50bp to 11.25%. The combination of fiscal austerity, PKR depreciation and higher interest rates will help rein in imports, thereby improving the CAD, but also causing real GDP to decelerate to 2% growth in FY2020. For a US$-based investor, Pakistan will offer negative returns over the next half-year, and anaemic EPS growth for at least the next 12 months. We recommend staying Underweight Pakistan.

Pakistan has reached a staff-level agreement for a 3-year EFF (Extended Fund Facility) loan from the IMF amounting to US$ 6 billion. This will be Pakistan's 22nd loan from the IMF, and will entail further fiscal austerity (to bring the primary deficit down to 0.6% of GDP in FY2020 from 2.1% in FY2018), a "market-determined exchange rate" (likely implying further depreciation, if not a one-off devaluation), likely further increases in interest rates to reduce inflation, and increases in energy prices (as part of a "comprehensive plan for cost-recovery in the energy sectors and state-owned enterprises"). The IMF staff-level agreement terms make it clear that these are pre-conditions for the IMF  management and board to agree to begin disbursing the first tranche of the EFF, which was expected to be in the range of US$6-12 billion (but is now confirmed to be at the bottom of that expected range). The IMF statement implies that tough action is essential to address Pakistan's yawning twin deficits (a fiscal deficit of nearly 7% of GDP and a current account deficit of 6% of GDP for FY2019). The forthcoming budget for FY2020 will require a tightening of the tax code (including closing loopholes to boost revenue mobilisation) in order to credibly bring the fiscal deficit below 5% of GDP (and the primary deficit to 0.6% of GDP). Additionally, the PKR (having already depreciated 35% in the past 2 years without improving the CAD) will need to depreciate another 10% over the next half-year; to counter the resulting inflationary impact, we expect the SBP to raise the policy rate a further 50bp to 11.25%. The combination of fiscal austerity, PKR depreciation and higher interest rates will help rein in imports, thereby improving the CAD, but also causing real GDP to decelerate to 2% growth in FY2020. For a US$-based investor, Pakistan will offer negative returns over the next half-year, and anaemic EPS growth for at least the next 12 months. We recommend staying Underweight Pakistan. 

Smaller-Than-Expected EFF from the IMF Implies More Austerity and Slower Growth

Pakistan

The Pakistan Stock Exchange (fka Karachi Stock Exchange) KSE100 Index comprises the top company from each of the 34 sectors on the PSX, in terms of market capitalization. The rest of the companies are picked on market cap ranking, without any consideration for the sector to make a sample of 100 common stocks with base value 1,000. This is a total return index.

Karachi Stock Exchange Kse100 Index (KSE100 INDEX)

Karachi Stock Exchange Kse100 Index (KSE100 INDEX)

Pakistan: Public and External Debt Remain Unsustainable; Policy Tightening Ahead

Public debt is 93% of GDP, & will rise after this year's tax cut. With policy rate at 7% in FY2020/21, inflation was 8.9% & trade deficit rose...

Prasenjit K. Basu

Pakistan: Covid-19 Response and Outcomes

The coronavirus pandemic is behind Pakistan and economic activity is gradually normalising. The government has spent PKR1.2trn in emergency fiscal...

Sharmila Whelan

Pakistan: A Pleasant Surprise

While he Covid-19 pandemic rages on in India, her neighbour Pakistan has bought the outbreak under control with surprising speed and efficiency....

Sharmila Whelan

Pakistan: Shaken, Not Stirred

We are bullish about Pakistan’s future even though the short-to-medium term economic outlook is clouded by the pandemic. Globally, the coronavirus...

Sharmila Whelan

Smaller-Than-Expected EFF from the IMF Implies More Austerity and Slower Growth

Pakistan has reached a staff-level agreement for a 3-year EFF (Extended Fund Facility) loan from the IMF amounting to US$ 6 billion. This will be...

Prasenjit K. Basu