Positive sentiment over a potential recovery in crisis-stricken Pakistan led to significant gains in the country's stock market. The benchmark KSE-100 Index experienced its highest intra-day increase since 2008, following the announcement of an International Monetary Fund staff level agreement and bailout, which alleviated concerns of a default.
Additionally, the Pakistani rupee strengthened by 4% against the US dollar, reaching a rate of 275 per dollar. The market's performance was so remarkable that trading was temporarily halted for one hour. By the end of the session, the index had risen by 6.2%, marking its largest gain since 2008.
Relief for equity investors
Amreen Soorani, Head of Research at JS Global, during an interview with Bloomberg, emphasized the significance of obtaining approval for the IMF agreement, as it has the potential to unlock market valuations and restore investor confidence.
During the last fiscal year, the Pakistani stock market continued to trade at attractive P/E multiples of below 3x. These low valuations were a result of lower investor confidence, primarily due to the delay in reaching a deal with the IMF.
Market’s average return
However, the recent signing of a deal with the IMF has significantly boosted investor confidence. This newfound optimism is now evident in the performance of the Pakistan Stock Exchange (PSX). Additionally, the historically low market valuations present an ample opportunity for a rebound in the near future.
Market’s response to key events
Financing remains a challenge
The current SBA program is divided into three tranches, each with a nearly equal size of $1 billion. Following the staff level agreement, it is anticipated that the first tranche will be released in the upcoming week. Additionally, experts predict that financing from other sources, such as bilateral partners in the Middle East and the Islamic Development Bank (IDB), will materialize towards the end of this government's tenure, around August.
As per economic analyst Yousuf Farooq, “The agreement is indeed a welcomed development, but it is important for everyone to be aware that it serves as bridge financing. It is crucial to acknowledge that by the time this program ends, there will be a need for another IMF program, and the best-case scenario would be a two-month import cover. The underlying issue lies in the fact that Pakistan faces debt repayments of over $20 billion for the next couple of years. One possible solution would be to acquire long-term debt to address short-term debt obligations or reprofile the existing short-term debt over a longer term to create some fiscal space.”
The concerns have also been reiterated by Moody’s and Fitch. As per the rating agencies, Pakistan will need substantial additional financing, in addition to the disbursements from the IMF, in order to manage its debt maturities and support economic recovery. While it is likely that the IMF has sought and received assurances for such funding, there remains a risk that it might not be adequate, particularly if there is a widening of current account deficits.
Moreover, the relaxation of import restrictions and other foreign exchange restrictions is expected to lead to a surge in dollar demand, coinciding with the substantial debt repayments. This scenario could potentially exert pressure on the Pakistani rupee, which is currently performing well as the gap narrows between the open market and interbank exchange rates.
However, the stability on the political front remains a crucial factor for sustained recovery. As the date for the upcoming elections approaches, it becomes essential to observe whether the current and caretaker governments can uphold the agreed-upon path with the fund.
