Political chaos crippling Pakistani markets, investment climate
The KSE-100 shed almost a quarter of its value in four months. Analysts say Pakistan requires a government focused on governance and transparency. Not likely any time soon
On Wednesday, October 4, the Karachi Stock Exchange 100 index closed at 40,461 points, have touched as low as 39,869.88 intraday. The market had lost 1,948 points in three days as selling pressures took their toll.
The tumble in the markets was just the tip of the iceberg, however. While investors and market analysts feel that the Pakistani government is “distracted,” they are also worried about taxation policies. Altogether, they anticipate that this is going to start hurting the economy and the country’s investment climate.
The main driver behind all of this is the ongoing political turmoil in the country following the ouster of Nawaz Sharif as Prime Minister in July. He had been serving as PM for a third time before his disqualification by Pakistan’s Supreme Court in the wake of revelations about his family wealth brought to in the Panama Papers.
The KSE-100 Index shed 1,670 points (3.6%) in the immediate hours after the apex court’s verdict, which also triggered a succession clamor, with the ruling Pakistan Muslime League-Nawaz (PML-N) sending mixed signals over its choice of replacement for Nawaz.
Ultimately, they settled on Shahid Khaqan Abbasi, whose appointment meant a reshuffle at the Petroleum Ministry. Meanwhile, Finance Minister Ishaq Dar’s own embroilment in the Panama Papers investigations, and the ongoing proceedings against the Nawaz family and associates for holding assets beyond their means has further dampened investor sentiment.
“The government clearly is distracted, which has not only resulted in the market’s plunge but also aggravated the investor environment all over the country,” Asif Baig Mirza, Director of the Lahore Stock Exchange and Chief Executive of ABM Securities, tells Asia Times. “There aren’t any new IPOs, any new investors in the market, because everyone wants to wait till things are stable.”
On May 25, a day before the government’s budget announcement for the ongoing fiscal year, the KSE-100 hit an intraday all-time high of 53,124 points. This means that in four and a half months, it has shed almost a quarter of its value.
However, while Mirza believes that the political crisis has taken its toll, it’s also likely that a stock market correction was overdue. “I hope the government realizes that the market has been suffering not just because of the political crisis, but also due to the budget,” former KSE Chairman Feroze Qasim tells Asia Times.
“The government clearly is distracted, which has not only resulted in the market’s plunge but also aggravated the investor environment all over the country”
Qasim believes a three-pronged taxation revision in the budget has hit the market hard.
“First, the increase in taxation on dividends by 50%,” he says. “They had raised it to 12.5% from 10% last year and this year it has been increased to 15%, which is a substantial hike over a short period of time.
“Second, the government’s inconsistent policy on capital gains tax. Capital gains has to be time-related, but the government meanwhile has standardized it at 15%, which is extremely high considering the risk element involved.
“Third, they have not made any provisions for tax on bonus even though we’ve been sending representations. The tax on bonus is basically a deduction on saving and on accumulated reserves after having paid all the other taxes.”
Sakib Sherani, a former economic advisor to the government and chief executive officer at Macroeconomic Insights, believes, however, that if the budget were a significant contributing factor the market would have dropped sooner after its announcement.
“Two things that are feeding into the market psyche are the political uncertainty and the growing economic uncertainty,” he tells Asia Times. “The finance minister is bogged down with his court cases and the economy is heading towards balance of payment difficulties and the market is worried that there is a lack of stewardship at this uncertain time.”
With the sitting prime minister maintaining that Nawaz Sharif is still the actual prime minister, and the federal government passing an amendment to allow the disqualified leader to PML(N) party president, there is a growing sense of continuity in government policies.
Mirza credits the China Pakistan Economic Corridor (CPEC) for expansion in the cement industry and expects the US$62 billion project to remain a source of investment interest.“The CPEC is the biggest emblem of the continuity of the policies of the ruling party, which will continue to bolster infrastructural work and the housing sector – which in turn will lead to the expansion of cement and steel industries,” he says. “And when they function with the expanded capacity, they will obviously have more profitability.”
“All those positive developments will continue in the background, but we’ll also have balance of payment difficulties, we’ll also need to go to the IMF. And for investors either in the bond market or equity market those are more important in the immediate term”
Last month, a Bloomberg report also declared Pakistan to be the fastest growing retail market in the world. Sherani says that while there are positive developments, growth in the housing sector and in retail are will only really play out in the long run.
“They are all demographic driven,” he says. “But investors are worried about economic management in the near term. And so while all those positive developments would continue in the background, we’ll also have balance of payment difficulties, we’ll also need to go to the IMF. And for investors either in the bond market or equity market those are more important in the immediate term.”
Mirza says that losses worth over PKR 1,000 billion (US$9.4 billion) run up by state entities and the country’s circular debt of PKR 600 billion and counting, will remain a major problem. “These entities need to be privatized,” he believes. “But to address these issues you need a strong government that is focused on governance, decision making and transparency, that can walk the talk.”