Pakistan secures $7 billion IMF deal: what it means for foreign investors

Pakistan has finally secured a $7 billion IMF deal right at the start of the fiscal year. The deal comes as no surprise as the finance minister Muhammad Aurangzeb had already said multiple times that it would be sealed this month.

But what does the deal mean for Pakistani equities and how are foreigner investors going to respond?

The boom and bust nature of Pakistan’s economy, and consequently, its stock market, makes it an intriguing capital market to operate in. Certainly not everyone’s cup of tea.

Investing in a politically charged environment

When foreign investors piled into the country’s stock market back in 2013 and 2014, they were disappointed to see how a sitting Prime Minister was removed in order to eventually get another party to lead the country.

That party, Imran Khan’s PTI, was then also removed in 2022 to bring back the same party that was removed in 2017.

By this time though, most of the foreign investors had already left the market, leaving the Pakistan stock market struggling and reduced to one-fifth of its market cap within 5 years.

Once bitten twice shy, the foreign investor has still not returned, at least not in the same numbers as was the case 10 years ago. And it is unlikely to happen anytime soon, considering how unpredictable the political climate in Pakistan can be.

Earlier today, former PM Imran Khan, who is in jail in multiple cases, received some relief as he was acquitted from one of the several cases he is dealing with. He’s still not out of jail, but things seem to be easing up for him.

Yesterday, his party won a landmark case and took back the parliament seats it was denied after the elections. While that is largely irrelevant in the context of the future governance of the country, it does show how the establishment is easing up the pressure on his party.

If you’re a foreign investor, you need a lot more than just assurances that the political drama is over. It will take a few more years before foreigners can start taking positions in the market again.

For now, the Pakistan Stock Exchange (PSX) will have to do with the handful of foreigners that are pouring little but much needed foreign exchange into the market.

FTSE downgrade and liquidation

Earlier this month, FTSE downgraded Pakistani Equities from secondary emerging market to frontier markets.

That downgrade will induce selling, as a number of funds follow the FTSE as their benchmark. The changes come into effect later in September and that’s when the liquidations might happen.

Therefore, in the short term, things don’t look rosy for the Pakistan market which has already reached all-time highs in expectation of the IMF deal. This might be a classic case of buy the rumour, sell the news.

One of Asia’s top performing market this year will have its task cut out in the upcoming weeks as the country comes to terms with the tough conditions that the IMF imposed before signing the deal.

Reduced purchasing power

After considerable devaluation of the Pakistani Rupee against the dollar, the public’s purchasing power has taken a hit. Thanks to a thriving black economy, this hasn’t directly impacted many non-cyclical businesses. But cyclical businesses have taken a big hit.

Of the $150 million that foreigners have invested in the Pakistani market, $62 million were poured in banking stocks. A further $34 million went into Power and Fertilizer sectors, two areas that the economy heavily depends on and are therefore most likely to receive a bail out even if the country defaults.

So the foreigners have so far played it safe in Pakistan. Despite a total of $10 billion promised by the IMF in a span of 1 year, the foreign investor is still not willing to trust the economy. In the next 6 months, that attitude is unlikely to change due to the factors mentioned above.

However, if the stability continues, at some point the investor will pile in. With declining inflation and declining interest rates, it could cause a rally much stronger than what we have already seen.

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