Thursday, 12 December 2024
Thursday, 12 December 2024
Pakistan’s stock market has taken off like a rocket, defying the country’s dire economic straits. The Pakistan Stock Exchange (PSX) surged to an all-time high of 111,012 points on Wednesday, marking a remarkable leap from 100,000 points just two weeks earlier.
Eighteen months ago, the market was trading at 40,000 points. So, what's driving this bull run with the economy still struggling?
While remaining under immense strain, Pakistan's economy has shown some signs of stabilisation. This, however, comes with a caveat: “relatively stable” is the key phrase.
As economic commentator Khurram Husain bluntly puts it: “Truth is the only good news is that we are no longer facing imminent default. That’s it. Other than that, not much else has changed, which presents serious problems.”
The International Monetary Fund (IMF) has approved a $7-billion loan that will give the economy some stability in the coming months, and the Asian Development Bank has just increased its 2025 growth forecast for the country to 3 per cent, up from an earlier prediction of 2.8 per cent.
Pakistan has also secured an additional loan from the UAE. But Pakistan’s broader economic challenges remain formidable.
The rupee has gained some ground, recovering from PKR 307 per US dollar in September to PKR 277 today. However, that’s still far from the PKR 152 seen in May 2021. Inflation, which hit a staggering 40 per cent in May 2023, has eased to 4.9 per cent in November, but that’s largely due to last year’s high base.
Meanwhile, urban poverty has deepened, with a massive 74 per cent of families struggling to make ends meet – up sharply from 60 per cent the previous year.
Interestingly, though, the banking, cement, pharmaceutical and fertiliser industries have reported soaring profits, giving the PSX a big push as investors pile into blue-chip stocks.
There are some reasons for optimism. The textile industry is picking up once again after a near-collapse when the central State Bank of Pakistan wouldn’t release scarce foreign exchange for yarn imports.
Now, like its Indian counterpart, Pakistan’s textile industry is benefiting from the slowdown in Bangladesh.
The auto industry, too, is gaining traction after a disastrous 2023 when sales slid to 85,087 – way below the 112,000 during the global economic crisis in 2009.
Automobile sales crashed in 2023 for two crucial reasons. Firstly, buyers stayed away from showrooms because of the uncertain economic situation. But this was made worse because the central bank didn’t have the foreign exchange to allow component imports, making production impossible.
The economic freefall prompted one commentator to remark: "It may seem Pakistan has finally hit rock-bottom with nowhere to go but up -- except that the 'rock' keeps sinking."
Helping the new momentum, one star performer on the PSX is Pakistan Petroleum, which has reached fresh heights following reports of a massive undersea oil and gas strike in the country’s territorial waters.
Analysts are already talking about the potential to cut Pakistan’s LNG imports.
With an oil import bill of around $15 billion in 2023-24 – 85 per cent of Pakistan’s crude is imported – this discovery could be transformative for the country’s crippling balance of payments deficit.
However, exploratory drilling, which is always a high-stakes gamble, hasn’t begun, and there’s no confirmation that the find will meet the lofty expectations.
Another key driver behind the stock market boom has been a sharp decline in interest rates, which have fallen from 20 per cent in June to around 12 per cent now. There is an expectation of further interest rate declines as inflation falls to a six-and-a-half-year low.
This has spurred mutual fund investments, with an additional $10 million injected recently.
But what’s the bigger picture? Despite the market rally, the broader economy remains precarious. Pakistan’s debt repayments continue to swallow any foreign exchange reserves, leaving little room for a major surge in economic growth.
While some view the market’s surge as a sign of resilience, others caution against over-optimism. “The rally might lose steam if the broader economic fundamentals fail to catch up,” warned one stock market analyst.
The price-to-earnings ratio of the PSX remains at a low 5, compared to 30 for top Indian firms like Infosys. This disparity underlines the market's undervaluation and the fragility of the economic recovery.
Pakistani economic commentator Husain points out that the signals of stability are exactly what happened in the first year of an earlier IMF stabilisation programme. The fact is that Pakistan has almost no way out of the hole it has dug itself into. Whatever foreign exchange it builds up now will go to repaying current and earlier debts.
Politically, the situation is arguably worse. While most agree former prime minister Imran Khan won the last election, he is now in jail. The military is determined to keep him out of power and is tightening its grip on the country by undermining the judiciary.
While the market bulls are clearly on a rampage now, the path ahead remains fraught with uncertainty. Is a weak and broke Pakistan good for India? It’s a nuclear state, and we can’t afford to have an unstable neighbor with weapons of mass destruction. India must tread carefully, avoiding actions that could exacerbate instability.
