Pakistan’s Air Raid Recoil Tendencies
Pakistan stocks lost ground but held on to 10 percent mid-year MSCI gains following dramatic Taliban airport and airliner attacks and renewed border insurgency prompting military counter-terror sweeps. The army will no longer entertain dialogue with this enemy although presidential candidates due to succeed Afghan President Karzai continue to entertain the possibility as occasional talks convene out of Qatar. The violent spurt coincided with another wave of kidnappings and bombings in the commercial capital Karachi, as well as the arrest in London of a prominent MQM movement leader on money laundering suspicions which sparked rioting by followers. The events swamped the afterglow of the $2 billion successful Eurobond return in April after a 7-year pause at a 550 basis point spread over US Treasuries, with annual $1 billion sovereign external issuance plans through end-decade. They also diverted attention from “mostly positive” performance in the IMF’s June program review, as this fiscal year’s GDP growth was raised above 3 percent as inflation stays in single digits and the budget and current account deficits improve slightly. Manufacturing and services are the main economic drivers with agriculture stuck “at the same level.” International reserves reached $8.5 billion on good remittance and development lender flows alongside the debt placement but import coverage is still under two months and FDI “disappointingly weak.” Fiscal targets remain elusive to push the tax revenue/output ratio over 10 percent as special concessions are phased out and telecoms license sales and limited state enterprise privatizations are prepared. Income and sales levies are due to be harmonized for individuals and companies and between Islamabad and the provinces, as a new capital gains charge goes into effect. On the balance of payments Saudi Arabia recently provided a $1.5 billion grant as the exchange rate continues to appreciate at odds with Fund call for greater flexibility. Central bank autonomy will be aided by updated legislation but private banks need to hike capital to meet standards and deposit insurance and insolvency schemes await action, according to the report. Public sector exposure is around half of assets and NPLS exceed one-tenth the total, posing system risks. Powers sector reform accompanied the Sharif administration’s return to office as circular arrears were settled but subsidy and tariff changes can be hastened in parallel with overhaul in the general business climate which has “lagged,” the Fund believes.
Vietnamese shares’ advance was also halted at the same range as riots against Chinese-owned firms in protest against South China Sea maneuvers spooked investors. The regime offered compensation to damaged operations and devalued the currency 1 percent as first half growth came in at 5 percent. The bilateral confrontation may hit FDI-led exports up 15 percent though the period, as interest rates may also be cut to stimulate activity despite bank balance sheet cleanup under the new central disposal agency which now must contend with geopolitical messes.
