In a major cabinet reshuffle yesterday, Mr. Asad Umar has resigned as Finance Minister and will reportedly be replaced by Dr. Abdul Hafeez Shaikh who will act as the Adviser on Finance. Other major cabinet changes include new appointments at the Petroleum, Information and Interior ministries, with the Prime Minister moving quickly to appease early signs of populist discontent, says a report of IMS Research.

Given Pakistan is about to enter an IMF program and the FY20 Budget is due next month, the timing of the change is unusual. However, the quick replacement can potentially provide some comfort to the markets, as the incoming de facto Finance Minister can take ownership of the IMF program, entry into which should not be delayed by the ministerial change, in our view.

The US-trained Dr. Shaikh is a seasoned economist who served as Pakistan’s finance minister from 2010-2013 under the PPP government, steering the economy as it transitioned back to democracy. Under his watch, a stock market amnesty scheme helped drive a 49% return in the KSE-100 in 2012. He was earlier the Privatization Minister during 2003-2006 under President Musharraf’s administration. This was one of the privatization ministry’s most productive periods – Pakistan attracted cumulative FDI of c US$6bn across FY03-FY06 of which more than US$2bn were privatization proceeds. Prior to his government roles, Dr. Shaikh worked with the World Bank across 1992-2000.

The KSE-100 has shed 12% from its 2019TD high to trade at a forward P/E of 7.6x (IMS Estimates). On a US$ adjusted basis, the market is down 3% for the year, continuing a downtrend in place since the second half of 2017. In his outgoing speech, Mr. Umar admitted to the economy passing through a tough phase. More macroeconomic pain can arise in the near-term particularly if the IMF pushes through on tough conditions, particularly on the fiscal side. Nevertheless, we believe this is already baked into valuations to a large extent, with entry into an IMF program (expected next month) likely to act as a major catalyst for the market.