South Asia’s Street Fight Stall

Pakistan shares tried to stay positive on the MSCI frontier index as the latest review of the $6.5 billion IMF program was delayed on religious and political opposition demonstrations against President Sharif as he summoned the military to restore order. A clerical leader and former cricket star and presidential candidate Khan have called for his ouster on grounds of vote-buying and anti-terrorism bungling as popular discontent lingers with rampant crime and power outages.  Foreign reserves at $7 billion cover less than three months’ imports, and further fiscal consolidation which trimmed the deficit to 5 percent of GDP will be difficult with the confrontation. Growth could fall short of 4 percent this year as the central bank remains on hold after early tightening under the resumed Fund accord. With energy subsidy removal inflation is heading toward 10 percent and may require another rate hike, which may also serve to support the currency down 5 percent against the dollar during the standoff.  Sri Lanka in contrast has maintained double-digit equity and external bond gains while dealing with animosities between Sinhalese and Tamils and Hindus and Muslims. The north is upset over the slow pace of post-civil war reconstruction amid lingering clashes and minority shopkeepers in the capital Colombo have been attacked for alleged mistreatment of customers. The administration has downplayed the troubles along with a UN inquiry into reported human rights abuse during the two-decade rebel fighting. It has placed consecutive sovereign bonds and pared the IMF’s role to post-program monitoring with 7.5 percent GDP growth from agriculture, tourism and light manufacturing. Inflation is down to 3.5 percent with the central bank stance neutral, and the rupee has been stable with incremental capital account opening.

Bangladesh stocks have dominated the subcontinent trio with a 55 percent MSCI advance as of Q3 with over 6 percent growth from both textile exports and domestic demand, and fiscal deficit improvement from VAT introduction under its Fund arrangement. A September mission urged governance changes and recapitalization for ailing state banks that have also fueled corruption and rivalry between the two main political parties. Prime Minister Hasina after winning re-election boycotted by opponent Khalida Zia has managed court approval for a criminal trial against her. The army has stayed away after returning power with earnings from UN peacekeeping missions and its diversified business portfolio at home. The government has common anti-Islamic militant and commercial interests with the new Indian regime as China and Japan continue to offer billions of dollars in aid. Russia has entered the mix with a nuclear plant feasibility study and Dhaka has exploited interest in the region’s newest frontier market Myanmar by proposing a highway connection. The early euphoria there has worn off as infrastructure and professional capacity constraints are overwhelming despite the recent award of foreign investor banking and telecom licenses. The former initial authorization for a single branch and hard currency business was designed for small street presence.