Pakistan’s IMF loan has been agreed, other multilateral and bilateral assurances of support have been received and access to the eurobond market should now open up, but we often find investors who are stuck in the recent past, still fretting about the country.
With the first tranche of US$1bn received following the IMF’s approval of the US$6bn, 39-month extended fund facility (EFF) programme and the local index currently the cheapest it has been in a decade, here are 10 reasons why you should be brave enough to invest in Pakistan.
1. Cheap FX rate – Real effective exchange rate was last below 100 over five years ago.
2. Sovereign US$ bonds are providing a good signal – Spreads over the EM index have narrowed c65bps since June 2019.
3. Strong corporate balance sheets – Banks are well capitalised and liquid, with macro slowdown implying earnings estimate cuts, not balance sheet distress.
4. Orthodox policy framework (reinforced by the IMF loan): inflation control, fiscal management – New technocrats are running finance and the central bank, and tax has been empowered to make structural adjustments.
5. Infrastructure upgrade: roads, rail, port and power are all improving – Long-standing power deficit is currently being addressed and the China-Pakistan Economic Corridor has been building off a very low base for logistics.
6. Supportive domestic politics – A new and stable military-civilian equilibrium for the next decade (after three decades of turmoil).
7. Security dramatically improved – Civilian deaths related to terror are at their lowest for 16 years.
8. Supportive geopolitics in terms of relationship with the US (IMF), GCC and China via balance of payments support – US interests, at least for now, again overlap with those of Pakistan via negotiations with the Afghan Taliban.
9. Stalemate in Pakistan-India geopolitics – Nuclear capability and mutually assured destruction limit the extent of friction with India; full-blown military conflict is very unlikely.
10. Tourism potential – Tourism could ultimately double its contribution to GDP as perceptions of security improve.
Of course, as with every country, there are risks, short term and structural –we lay out six key ones. These risks should be taken seriously, but the more appropriate time for this is when Pakistan has returned to at least its average valuation of the past five years
1. Low FX reserves – FX reserves are critically low at the start of the new IMF programme.
2. Decelerating growth, high debt (crowding out) as economy undergoes structural adjustment – Forecast cuts by the IMF (prior to new loan programme).
3. Low exports, particularly in job-creating manufacturing – Pakistan’s exports have declined, while peers’ exports have grown; however, the value mix in textiles is improving.
4. Military expenditure remains very high relative to the size of economy – The military still occupies an out-sized share of the economy.
5. Poor health and education levels – There is surplus, cheap labour, but low productivity (poor health, education).
6. Water-supply vulnerability arising from Pakistan’s water flows from Tibet-China and via India (Indus Water treaty).