Pakistan’s main stock index experienced its largest surge in 15 years on Monday following the country’s successful negotiation of an initial $3 billion loan deal with the International Monetary Fund (IMF), alleviating concerns of a default.
The KSE-100 Index, Pakistan’s benchmark index, gained enough momentum to trigger a one-hour trading halt early in the session after reopening following the Eid holiday. It climbed as much as 6.3%, on track for its biggest increase since 2008.
This rebound follows the recent draft agreement with the IMF, providing Pakistan with a lifeline to avert a potential debt default. The nation is currently facing its worst economic crisis on record, characterized by high interest rates and inflation. To meet the IMF’s conditions, Pakistan has implemented measures such as tax increases, energy price hikes, and a devaluation of its currency in January. The Pakistani rupee has depreciated by over 20% this year, making it one of the worst-performing currencies globally.
Ruchir Desai, a fund manager at Asia Frontier Capital Ltd. in Hong Kong, stated that the IMF deal offers some reassurance to investors regarding Pakistan’s ability to meet its short-term external repayment obligations. He believes the market will perform well in the coming weeks.
Additionally, the market is benefiting from attractive valuations. Despite recent negative headlines covering political instability, the risk of a debt default, and a weakening currency, investors are finding the KSE-100 Index to be the cheapest equity benchmark globally.
Ali Raza, the head of international equities trading at BMA Capital in Karachi, highlighted the market’s dirt-cheap valuations and significant potential for a rebound.
Meanwhile, Pakistan’s dollar-denominated bonds have also gained value, with the 2024 bonds increasing by over 20 cents in the past week. The 8.25% 2024 bond traded at 72.5 cents on the dollar on Monday, up 0.2 cents, marking a level last seen about a year ago in August. These gains come after the best-performing week for Pakistan’s dollar bonds.
Positive economic indicators are also contributing to the market’s momentum. Pakistan’s inflation rate eased in June for the first time in seven months due to record borrowing costs reducing demand and lower commodity prices slowing price increases. Consumer prices rose by 29.40% compared to the previous year, slightly below the median estimate in a Bloomberg survey and a decrease from the record 37.97% increase in May.
However, challenges remain for Pakistan, as it faces approximately $23 billion in external debt obligations due in the upcoming fiscal year, which is more than six times its foreign exchange reserves. With reserves currently at $3.5 billion, covering less than a month of imports and falling below the global standard benchmark of three months, Pakistan’s ability to fund imports and sustain operations in many factories is limited.
Nonetheless, the IMF bailout has shifted the outlook for some market observers. Barclays upgraded Pakistan’s debt to market weight following the development, and Moody’s Investor Service expects the deal to unlock support from bilateral and multilateral partners, assisting the nation with its high external debt repayments.
“This is the first-ever market halt on a positive rally,” said BMA’s Raza. “This is a significant day for Pakistan equities.”
** Taking lead from BNN Bloomberg