Political uncertainty triggered falling of PSX last week

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The KSE-100 underwent snap selling across the board as the index shed ~1,600pts (~4%) to break the 40,000 pts barrier. The selling resulted from economic concerns, political crisis, the drawdown in forex reserves and panic selling by broker-dealers and individuals.

Punjab remained at the centre of political turmoil as the PDM submitted a VoNC against the sitting CM in a bid to counter the dissolution of assemblies that was due to be done by PTI and PML-Q on Dec 23rd. However, the said session was never called upon and stating the failure to hold a VoNC, the Punjab Governor denotified the CM while dismantling his Cabinet. The following day, the VoNC was rolled back ,causing all sorts of confusion amongst the investor community and giving Imran Khan the lifeline to dismantle the assembly once again ;however, only a day earlier had the PTI government decided to reverse its earlier decision of dissolution of the KPK assembly thus keeping people guessing about the next step from both the parties. On the economic front, the government and the IMF continued preliminary discussions leading to the 9th review however, there was no fruitful outcome as they were unable to find middle ground on power sector reforms, revenue collection and fiscal imbalances. Furthermore, S&P Global downgraded Pakistan’s long-term sovereign credit rating to CCC+ from B citing weak economic fundamentals. Ongoing uncertainty was also reflected in the PKR as it shed 0.3% WoW against the USD in the outgoing week to settle at 225.6. As for the index performance, the KSE-100 made marked highs and lows of 41,393pts and 39,277pts respectively to settle at 39,669 pts (↓1,632 pts, 4.0% WoW). Traded volumes were recorded at 88Mn shares (↑19.4% WoW) while traded value was reported at USD 18Mn (↑9.7% WoW).

On-boarding IMF is the top most priority: Forex reserves held by the SBP receded to only USD 6.1Bn in the previous week with the differential between commercial banks held forex shrinking to less than USD 250Mn. That said, the forex reserves can only support about 5 weeks of imports, with the last such level seen around mid 2013 when the country was tackling a severe Balance of Payment crisis. Keeping that in mind, revival of the IMF program is essential for shoring up forex reserves and instilling some sort of business confidence while also paving way for multilateral/bilateral inflows as the country struggles to keep itself afloat. However, pretty much like the previous IMF review, bringing the international agency on board will be an uphill task for the government and would require some radical changes particularly with regards to circular debt settlement, taxation measures and fiscal prudence but uptil now, no major progress have been made as the government remains adamant on meeting its earlier set targets. Nonetheless, we can expect upward revisions in energy tariffs, doing away with subsidies and increased tariffs to discourage import of non-essential items to be the few reforms that need to be taken.

Major data releases during the week included: 1) CAD for Nov’22 declined by 86% YoY to USD 276Mn(5MFY23 CAD: USD 3.1Bn;↓57% YoY); 2) FDI declined by 51% YoY in 5MFY23 from USD 885Mn to USD 430Mn; 3) Govt. borrowing rose by USD 5.1Bn in 5MFY23 compared to USD 4.7Bn in the SPLY; 4) Pakistan’s REER declined to 98.8 in Nov’22 (↑0.2/↓1.3% YoY/ MoM respectively); and 5) Services deficit receded to USD 848Mn in 5MFY23, ↓50.5% YoY.

Outlook: Political noise has once again started to take center stage and only adds fuel to the mounting economic concerns. Delay in IMF review, weakening forex reserves and building pressure on the PKR suggest a defensive investment strategy unless there is clearer direction on the macroeconomic front. We maintain a preference for Banks, E&P’s, Fertilizers, IT & IPP’s.

Courtesy – BMA Capital Management Ltd.

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