Trader’s Guide to Pakistan Elections Ahead of Crucial IMF Deal

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(Bloomberg) — Pakistan is gearing up for two key events in quick succession: a general election and the expiry of an International Monetary Fund bailout program. The election winner will be tasked with striking a new deal with the IMF, which investors say is crucial to the nation’s outlook.

The country heads to the polls to elect a new premier Feb. 8, while the IMF’s current rescue package ends in March, just before $1 billion in dollar bonds come due the following month. Pakistan’s finances will collapse without a new funding agreement, according to all 12 respondents to a Bloomberg survey.

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On the flip-side, if the new government is able to agree on a fresh IMF program then Pakistan’s assets can extend their world-beating rallies, according to money managers including NBP Fund Management Ltd. and Asia Frontier Capital Ltd.

“Investors will watch how soon the new government can negotiate a longer-and-larger loan program with the IMF,” said Ruchir Desai, a fund manager at Asia Frontier Capital in Hong Kong. “Very discounted valuations, interest rates peaking out and the prospects for an earnings recovery will add to the optimism surrounding greater political stability.”

Gaining access to a new round of IMF funding is critical to reviving Pakistan’s economy and may help the country secure financing from other creditors such as Saudi Arabia. The cash-strapped nation’s external financing requirements will average about $27 billion every fiscal year from 2025 through 2028, the IMF has said.

The main contenders in the election are three-time former premier Nawaz Sharif, 35-year old previous foreign minister Bilawal Butto Zardari and sugar magnate Jahangir Tareen. The most popular candidate Imran Khan is effectively disqualified, being held in jail since last year on corruption charges. 

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Pakistan’s benchmark KSE-100 Index has jumped about 50% since the nation reached an initial bailout deal with the IMF at the end of June, the best performer of more than 90 equity indexes tracked by Bloomberg. The rupee has strengthened about 2% over the same period, beating all its Asian peers, while the price of the nation’s dollar bonds due 2024 has almost doubled from its low in June.

Even after the KSE-100 Index’s rally, the gauge is still trading at a price-to-earnings ratio of just 3.8, which is a discount of 45% to its 10-year average. That’s even lower than some countries that have defaulted on their external debt.

“If the new government comes in and successfully negotiates a new IMF program, we may see the Pakistan rupee appreciating, interest rates will come down, and the Pakistan stock exchange will surge back to 10-to-12 times P/E,” said Adnan Sami Sheikh, an analyst at Pakistan Kuwait Investment Co. in Karachi.

While the government is now in a better negotiating position than it was before last year’s IMF deal, the Washington-based fund has said Pakistan needs a market-determined exchange rate, larger foreign reserves to help limit external shocks, and a tighter monetary stance to contain inflation. 

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Pakistan has largely remained committed to those goals. The central bank kept its benchmark interest rate at 22% for a fifth meeting on Jan. 29 in an effort to curb the region’s fastest inflation rate, which has been propelled by rising energy costs and the weakness of the currency in early 2023.

“No matter who wins and who loses the election, our policies going forward will mostly be IMF-dictated,” said Amjad Waheed, chief executive officer in Karachi at NBP Fund Management, which oversees about $820 million. “We can see some upside in equities. Inflation and interest rates will move downward going forward, which should be good for the bond market as well.”

Any steps taken by the next government to narrow the fiscal deficit will help utilities and oil-and-gas businesses, while initiatives to improve tax collection will boost the overall appeal of Pakistani assets. Potential future cuts in central bank interest rates once the economy returns to a surer footing can aid cyclical sectors such as materials.

Analysts are divided on which of the potential new premiers would be best placed to oversee much-needed economic reforms. 

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Given Sharif and his party have previously performed relatively well at managing the economy, investors are probably placing bets on his comeback, according to an analysis by Bloomberg Intelligence. Meanwhile, Gallup polls show former Prime Minister and cricket star Khan remains the country’s most popular politician. 

History Lesson

History shows no matter who wins, putting money into Pakistan stocks before an election has reaped dividends. Those who bought the KSE-100 Index the day before a national vote gained an average 7% over the following month, while the mean advance over a three-month period was 19%, according to data from the past six elections compiled by Bloomberg.

Any such gain this time round will depend on whether the next leader can negotiate a bigger-and-better program with the IMF.

“We believe the IMF will consider sitting with the elected government for a longer-tenor program,” said Amreen Soorani, head of research at JS Global Capital Ltd. in Karachi. “Higher confidence levels would increase the prospects of removing negative sentiment” that is causing the current low multiples in the stock market, she said. 

—With assistance from Chiranjivi Chakraborty, Ankur Shukla (Economist) and Faseeh Mangi.

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