Pakistan gears up for crucial elections amid global uncertainty

Pakistan is among the 40 countries that will hold elections in 2024, a year that will witness major political shifts across the world. The outcome of these elections will have significant implications for the global economy, as the countries involved account for more than 35% of the world’s population and more than 40% of the world’s GDP. Some of the key nations that will go to polls are United States, Russia, India, United Kingdom, Bangladesh, Mexico, and South Africa.

Pakistan’s general elections are scheduled for 8th February 2024, after a prolonged caretaker government that lasted for almost six months. The timely conduct of the elections is crucial for the country’s economic stability and development, as it is a precondition for the continuation of the IMF’s SBA program that provides financial assistance to Pakistan. Moreover, the elections will also determine the fate of several long-term projects that involve foreign investments, especially in the energy and infrastructure sectors.

The equity markets in Pakistan are closely watching the political developments, as they will affect the country’s macroeconomic indicators and business environment. The market participants are expecting the next government to pursue reforms in the energy and trade sectors, curb illicit and informal activities, and attract foreign exchange inflows. These measures are essential to maintain Pakistan’s external balance and avoid excessive depreciation of the PKR against the US$.

Another factor that will influence the equity markets is the continuity of the policies set by the Special Investment Facilitation Council (SIFC), a body that was formed recently to oversee and expedite the investment process in Pakistan. The SIFC comprises of senior government officials and the Army Chief, and aims to provide a conducive and secure environment for investors. The SIFC has been instrumental in facilitating some of the major deals in the recent past, such as the sale of K-Electric to Shanghai Electric and the acquisition of Dewan Cement by Bestway Cement.

Pakistan’s economy is expected to face some key risks in the upcoming year, which could affect its growth prospects and investor confidence. These risks include:

  • Delays in US$ inflows: Pakistan relies on external financing to meet its balance of payments needs, which are expected to be met through a combination of adhoc measures, a new IMF program, and support from other external lenders. However, any unfavourable developments, such as Pakistan’s failure to secure a new IMF program due to lagging reforms, or delayed support from friendly countries due to changing geopolitical interests, could deplete the SBP’s foreign exchange reserves and undermine the country’s macroeconomic stability.
  • CPI pressure delaying monetary easing cycle: The recent decline in secondary market yields suggests that the market anticipates a peak in interest rates, with the first cut expected soon. However, any further pressure on CPI, which could be caused by higher PKR depreciation, rise in global commodity prices (especially oil), or higher than expected impact of energy reforms on gas and power costs, could keep the real interest rates negative and postpone any monetary easing cycle.
  • Uncertainty with regards to elections / new set up: The General Elections are scheduled to be held after a relatively long Caretaker set up of about 6 months (usually 3 months). Any further delay or concerns about the new set up’s focus on populist measures that may destabilize the macroeconomic landscape could reduce the market optimism and confidence revival.

All these risks ultimately affect the PKR movement, which is expected to be one of the main concerns for CY24. Given that Pakistan has already witnessed a 40% PKR depreciation in the last two years, we believe that a broader currency adjustment has already taken place. The recent favourable move has only been 8%. However, a sharp decline in PKR against US$ would not only dent investor sentiments but also result in a negative earnings impact on a number of sectors.

Among the key losers would be Oil & Gas Marketing, Refineries, Steel, Chemicals, Cement, Auto, Pharma sectors, while among the key gainers would be E&Ps, Textiles, Technology sectors and other companies that benefit from exports.

Furthermore, any measures such as administrative controls on imports to curb trade deficit as a way to reduce any potential sharp PKR depreciation would have a negative impact on the Autos, Pharma, Chemicals, Textiles, Steel and Mobile assembling sectors.

Pakistan may see first interest rate cut in four years from March 2024, analysts say

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