Top line: the rally in Pakistani stocks is over. Bottom line: investors should steer clear of Pakistani stocks. So reads a recent country report on Pakistan’s investment strategy by the renowned Canada-based advisory firm BCA Research.
Coming at a time when the stock market has very recently touched all-time peak and the mood is buoyant, the report could well be dampening especially in terms of foreign investors’ participation.
Pakistan is no stranger to ‘steer clear of Pakistan’ advices by foreign firms, but the stock market has mostly been spared. The report bases its thesis on weakening macroeconomic fundamentals, saying the tremendous rally that it was, seems to be over and there is not enough gas left in the tank That may or may not be the case, but statistics used as support do paint a dark picture.
The report emphasises that the remarkable rally was not built on core macroeconomic fundamentals, but was rather fuelled by foreign support, fiscal largesse and the euphoria over smooth political transition. There is reason to believe in BCA’s thesis-–Pakistan boasts of the worst saving-to-GDP ratio in the entire region. India, sadly, is no more a comparison, so Pakistan’s saving-to-GDP ratio is half of what it is in even Bangladesh and Sri Lanka.
The report raises a very valid point on Pakistan’s productive capacity, which has suffered a great deal in the last 6-7 years. The fiscal deficits are huge and that takes the steam off capital expenditure. Heavy government borrowing has resulted in crowding out of private sector, which is evident in the dismal figure of 17 percent of GDP for bank credit. From the market’s perspective, it may well have built all these negatives in but these are structural issues and one cannot expect the sun to shine on for infinite periods.
While the government merrily continues to borrow at hefty rates, her behaviour has not gone unnoticed in the international community. The risk of increasing bond yields and the banks’ high investment-to-deposit ratio can prove tricky going forward. Not to forget, the KSE rally owed a great deal to the banking stocks, which now seem to have run out of steam. Banks are carrying the risk of running losses on government bond holdings as yields are on the up.
Balance of payment, import competiveness, FDIs, import cover and structural bottlenecks are variables that have been dismal for quite some time now.
The stock market surely cannot run in isolation for a long time. Something is got to give and it appears foreign investors may soon be on a selling spree. Watch out!