JP Morgan – a global leader in financial services – has issued a report about the investment climate in Pakistan. Titled ‘Pakistan: Reassessing the Investment Thesis’, the report highlighted that there have been positive developments in Pakistan in recent months.
Some of these developments include the resumption of the $6 billion IMF deal, improvement in the current account that has also helped the rupee, better projections of the FY21 growth rate that points to a sharp rebound from the COVID-19 shock, and the shrinking of the fiscal deficit in GDP terms.
However, this does not free the economy of multiple challenges, including risks around the current account deterioration from the fading remittances and higher commodity prices, the elevated risks of frequent COVID-19 waves with the low levels of vaccination weighing on the growth outlook, the largely negative real yields, and the political pressure to stimulate growth that will presumably require a reappraisal of the IMF program targets.
The report said that the resumption of the IMF program on 24 March had renewed interest in Pakistan and boosted investors’ confidence. This had been reflected in the oversubscription of Pakistan’s $2.5 billion Eurobond issuance in March.
The report detailed that foreign investors have been more hesitant to re-engage with local markets, and that “The IMF program is undoubtedly an important cornerstone of the investment thesis in Pakistan, but there are other issues investors should be aware of in the coming months, in our view”.
Some of the issues that the report outlined include:
The extent of the government’s commitment to fiscal consolidation: The FY2022 budget due to be presented on 11 June is expected to pencil in further fiscal consolidation, although potentially less than initially agreed with the IMF, particularly as the government is now keen to stimulate growth;
Reduced remittances inflows will likely weigh on the current account, but increased financial flows should be supportive of the overall BOP: The current account has been well supported by remittances, but JP Morgan expects this force to fade. Higher commodity prices are also a drag on the external account;
The SBP is likely to continue accumulating FX reserves when it can: The combination of a wider C/A deficit and the Central Bank’s desire to increase reserves should result in a weaker rupee going forward;
The SBP continues to appear dovish in light of the difficult pandemic situation. However, global financial conditions, domestic growth, inflation, and CAB dynamics should tilt the balance toward some tightening; and
The economy will probably grow around potential over the near- to medium-term: JP Morgan expects the economy to grow by around four percent year over year in FY22, but more waves of COVID-19 and slow progress with the vaccine pose downside risks.
The report also praises the IMF deal but considers it to be challenging in some aspects for the government, especially when it comes to fiscal consolidation. JP Morgan also estimates the remittances inflow to slow down eventually but expects external support to continue.
The current account may also have to bear the brunt of the decrease in remittances. However, the report commends the revival of Pakistan’s economy in the wake of the pandemic-related shocks and expects the growth to maintain momentum in the coming fiscal year unless drastically impacted by another wave of COVID-19.
Local currency markets: In their view, risk-reward has been improving in Pakistan. But the main hurdle for initiating long positions is valuation: the PKR REER is around its long-term average, while nominal and real yields in T-bills and T-bonds are lower than yields on offer elsewhere in the frontier universe.