Market on the knife-edge

The market’s poised on a knife-edge as the new prime minister holds meetings and spells out priorities in a desperate attempt to avoid not just outright economic collapse, but also possible default down the road. It’s not very often, after all, that you see possibly the largest one-time rate hike by the SBP (State Bank of Pakistan), that too in an emergency meeting 12 days ahead of schedule, and also a record one-day stock market rally within the space of a few days.

The sudden MPC (monetary policy committee) meeting of 7 April, and the 250bp hike in the interest rate, was in fact the State Bank surrendering to the reality of stagflation. The current account is in deep trouble and exports barely budged even though the rupee was murdered in the money market, and the only way prices are headed is up; hence the extremely hawkish step by the central bank.

Yet the market breathed a sigh of relief when the Supreme Court overturned the previous administration’s subversion of the constitution and made an unprecedented day long advance as Shehbaz Sharif outlined his broad economic policy in parliament on 11 April.

It seems businesses are counting on the new government to resume the IMF (International Monetary Fund) programme and produce enough order and growth to keep the wheel turning for now; despite the inflation. Even the rupee has broken its relentless fall and clawed all the way up to 182 or thereabout against the dollar, after touching 190 just a few days ago.

But much of the stock and currency market reaction is based on perception, while the SBP’s squeeze was forced by facts that even Governor Baqir cannot deny anymore. So the next few days are going to be crucial. And it doesn’t help at all that attempts to form a working cabinet and talk to the IMF again are coinciding with PTI (Pakistan Tehreek e Insaf) agitating on the streets and doing all it can to keep just those things from happening.

The jury is still out on how bad an idea the mass resignations was, but there’s no doubt that PTI has chosen to do its politics in protests and demand an immediate election. And on top of laughing away a parliament without any credible opposition, it will also milk the hardships caused by the government’s adjustment policies, especially if it’s to go back to the IMF, for all they’re worth; now that the shoe is on the other foot.

That’s when perception in the market will change once again. If there is going to be more political confrontation at this stage, especially if the government’s investigation finds nothing in the so-called cable threat, then there is going to be a lot more uncertainty. That will quickly spook whatever little investment, local as well as foreign, portfolio as well as direct, that might have been attracted by the recent shift in sentiment.

It’s also a little strange that while everybody’s been talking about how long or short the new government’s tenure might be, and what that would mean for the country’s politics, nobody’s yet talked much about the budget.

What we do know for sure is that most, if not all, important targets from the last budget are sure to be missed, exports continue to disappoint, remittances are plateauing, and inflation expectations have upset the central bank’s calculations.

Also, much of the external risks that forced SBP to turn so hawkish remain elevated. And then there’s the internal turmoil, which is also likely to boil for a while. Clearly, nobody’s had time to look at and learn from what just happened in Sri Lanka. It doesn’t seem as if the market will stay balanced on the knife-edge too long.

Copyright Business Recorder, 2022