Pakistan likely to reap benefits of structural, economic reforms: analysts

Pakistan is likely to reap the benefits of structural and economic reforms, which has been a long drawn process, analysts said The government has coupled the economic policy decision making with a strong foreign policy, they added.

Pakistan political situation has also improved as the incumbent government has shown greater flexibility towards its predecessors and opposition in recent times, Muhammad Sohail, senior analyst and CEO of Topline Securities said.

"We believe, it is highly unlikely that Pakistan will get blacklisted by the FATF. We expect pick up in overall economic activity from the second half of 2020, fueled by overall improvement in business confidence, likely cuts in interest rates and a stable currency," he said. However, it will be imperative for the government to keep fiscal deficit in check.

Encouragingly, the government has curtailed current expenditures vis-à-vis development expenditures. "We expect at least 200bps cut in policy rate during 2020, and a cumulative reduction of 350bps to 9.75 percent spread over 2020-21, driven by lower inflation readings and a real interest rate of 2.5-3.5 percent."

He was expecting inflation to average at 11.0 percent in FY20, with inflation readings to drop to single digits from July-2020. "We expect exchange rate stability over the next 12 months given build-up in reserves by the SBP, through reduction in current account deficit (CAD), foreign portfolio investments in T-Bills (carry trades), spot purchases by the central bank itself, inflows from the IMF and other multilateral agencies, Euro/Panda bond issues and privatization proceeds," he said. "We expect PKR/USD at around Rs 158 by June-2020."

He said that the KSE-100 has registered increase of 41 percent (45 percent in USD terms) since its bottom on August 16, 2019 (till Dec 12, 2019). He believed there still remains plenty of upside from here. "We believe the market is potentially set for further rerating in 2020 on the back of recovery in corporate profitability, increasing cash liquidity and greater flexibility of the incumbent government towards its predecessors," he said and set an index target of 49,000 by December-2020, an upside of 21 percent from here.

He believed current 1-year forward P/E of 7.0x, is yet to price in improving economic dynamics as historically, during periods of economic recovery, KSE-100 has traded at an average P/E of 8.0x. The improvement in overall risk profile of Pakistan, is also evident from Pakistan's country risk premium, which has fallen sharply, showing increasing confidence in Pakistan's sovereign risk.

De-dollarization, falling attractiveness of fixed income instruments and lack of other avenues to park liquidity is likely to result in increased flows towards equities. "We expect foreigners to likely follow suit, as Pakistan equities continue to make headlines (MSCI Pakistan has outperformed MSCI EM by over 20 percent during the past three months).

He was expecting corporate profitability to take comfort from pick-up in aggregate demand, a stable currency and decline in interest rates.

"We are over-weight on Oil and Gas Exploration (on the back of undemanding valuations), Cements (expected recovery in demand and pricing) and Fertilizers (high D/Y and sturdy margins)", he said.