Pakistan’s Heartfelt Historic Hump

Pakistan shares led the MSCI Asia frontier pack with a 5 percent gain through May in anticipation of the index provider’s reinstallation as a core member, and another favorable IMF review as the program approaches breakthrough September successful completion. The market was relegated to the lower less-liquid tier in 2009 after authorities periodically suspended trading under financial crisis overhang, when international support facilities were also on hold for economic and geopolitical reasons. GDP growth has revived to 4.5 percent and the central bank continues to cut rates on inflation around the same range. Foreign reserves reached $17 billion or four months imports in April aided by a lower current account deficit, and the rupee has been stable while appreciating in real terms. All Fund targets with the exception of tax revenue have been met, including bank overhaul and state enterprise privatization acting as equity catalysts. On the debt side domestic and external sukuk issuance has been a priority and drawn in new investors, and energy and infrastructure projects won cash and technical backing from China and Iran. Prime Minister Sharif has touted these successes despite his notoriety following “Panama paper” revelations of offshore accounts. He has also given the army free reign for anti-terror and militant operations, contributing to improved security sentiment in the view of business community representatives. Opposition party leader and former cricket star Khan has resumed corruption attacks on his tenure, but failing health may pose a more serious challenge after he underwent open-heart surgery to an uncertain prognosis. Rumors persist that he may soon step down, but no next-generation successor seems in line to fill the void, leaving traditional influential family politicians and the military again to determine the choice.

Sri Lanka slipped for the period as it inked its own $1.5 billion IMF arrangement supplemented by another $650 million in bilateral and multilateral aid… This year’s fiscal deficit goal is 5 percent of GDP and monetary policy should also tighten to slash 25 percent annual credit growth concentrated in consumer lines. Capital outflows have reduced reserves to $6 billion but the central bank has refrained from heavy currency intervention as it follows advice for more flexibility. The President has agreed to cooperate with the UN and human rights groups on abuse investigations during the civil war era, and to devolve power to the Tamil-dominated north under a tentative formula. His party is also pressing claims against the longstanding predecessor for alleged misuse of office, but his family is protected as sitting parliament members by immunity rules and grassroots patronage through their wealth. Mongolia was previously considered an MSCI Index entry candidate, but prospects have faded with another election due at end-June showing a tossup between the main two parties and a large undecided vote. The economy advanced 3 percent in Q1on net exports, while domestic consumption and investment stalled. The second phase of the giant Oyu Tolgoi mine is set for the coming months, as FDI doubled to $225 million through April. The OT project in joint venture with Australia’s Rio Tinto is estimated to bring in $1 billion annually through end-decade, and should help tackle a medium-term debt repayment hump with agriculture output at a plodding pace.