Changing sentiments?

BR Research August 26, 2019

Last week the news flow was positive; and the stock market reacted to it with 9 percent recovery. A fresh wave of positivity; but the question is how sustainable will this be. The economic conditions were not as bad as perceived in the last one year; and things are not at all rosy now, to start jubilating. Nonetheless, changing sentiments are imperative for restoring domestic investors confidence.

The Army Chief’s extension news altered the flow. It was on cards, and there is no surprise element in it. But now the clarity is that current set of policies will run for three years or perhaps even more as some analysts are predicting the next chief in line as well. One may wonder why the Army Chief is so important? Well, to put it simply and naively, having civil and military on one page is imperative for running consistent economic, foreign and interior policies.

The other important development is that cabinet recognized the fact that NAB is unduly harassing businessmen, and that has damned investor sentiments. There are now talks of changing NAB ordinance to keep them away from businessmen. Beyond the issue of NAB’s jurisdiction, the institution does not have the capacity to deal with complex business issues.

Around 3-4 big business houses in Pakistan including Nishat, Lucky and Engro came under the institution’s scrutiny in the past few months. Either the references lacked substance or inquiries were beyond the subject. NAB asked a listed company’s management that who are your three thousand plus shareholders – are they fictitious? Why did you sell them shares? And one officer threatened to call all of them for investigation. A few of these shareholders might be holding just 100 shares of that company.

In another case, an independent director of a PSE was called by NAB over an inquiry of hiring CEO of that PSE. That director happens to be CEO of one of the leading cement company; and is one of the most aspiring entrepreneur of the country. Similarly, bureaucrats are questioned on taking numerous decisions. Now the civil servants are not ready to sign on any deal while businessmen are staying away from government initiated projects.

That is why Punjab government is finding it difficult to have a buy in of its officers in selling off two RLNG plants, while investors are simply not interested. One may say that the government is eyeing for foreign investors. How can any foreign investor come, when big local groups are being harassed?

The third good news is that CAD has shrunk to one fourth of what it was same month last year. It’s not just to make a view based on a month’s data, but the economic pulse is giving the signal that CAD will remain relatively low (read “Current account in control’).

The good news is that international commodity prices are suppressed and expected to remain low, and Pakistan being a net importer, will benefit from it. That is why, in the recent PIB auction, the market has shown the signal that there is no further expectation of interest rate hike, and the doves may come in action in 2-3 quarters (read “The yield curve inversion”).

Apart from this other news like some oil discovery, money flowing in the country by telcos on license renewals are cherry on the top. Having said that, the crisis is not over yet. In terms of numbers, the worst hasn’t come yet. Inflation is likely to peak in September; and LSM numbers may be even worse in 1HFY20. The fiscal deficit may miss its target, and will remain well above 7 percent of GDP in FY20. But perception is changing.

Copyright Business Recorder, 2019

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