THE Chairman of the Securities and Exchange Commission of Pakistan, Zafar Hijazi, was in Karachi on Thursday to shoo away the bears from the country’s stock market.

Mr Hijazi, who is facing charges for tampering with and shutting down an ongoing investigation into allegations of money laundering against companies owned by the ruling Sharif family, sought to reassure investors that “political events are passing matters and that they should (instead) focus on market fundamentals”.

The benchmark KSE-100 index has lost a little less than a fifth in the last couple of months over concerns of political instability in the wake of the judicial probe into offshore assets of Prime Minister Nawaz Sharif and his children as ‘revealed’ by the Panama Papers leak. More recently, the market experienced a bloodbath in the days following the release last Monday of a damning report against the ruling family before calming down at the weekend.

“Weak economies like ours with a semblance of economic stability on borrowed money can rarely afford political upheavals”

Analysts, however, warned that the calm could be temporary as investors remain cautious because of growing uncertainty over political future of the prime minister. “Investors remain cautious and are keeping a close watch on political developments as Mr Sharif battles to save his government. Another bad news can cause the market to crash,” a Karachi-based financial analyst said, refusing to give his name.

But then the stock markets don’t really operate the way the ‘real businesses’ operate. “The stock markets are driven mainly by popular sentiments and perceptions, which may or may not be supported by any economic facts and logic. The capital markets create their own realities and rationale,” says businessman Almas Hyder.

“The businesses, on the other hand, run in a certain economic reality. Thus we are not affected by political instability or uncertainty unless consumption patterns change or supply chain is disrupted because of political violence and strikes,” he said. “Since there is no visible signal or sign of a change in the consumption patterns of public or government due to political uncertainty in the aftermath of the Joint Investigation Team’s report, our businesses remain unaffected by it.”

Nabeel Hashmi, another Lahore-based manufacturer and exporter of auto parts, believed that businesses have already factored in the “political noise in their costs”.

He pointed out that if the country’s exports were in trouble and declining, it was on account of hardcore economic reasons: rising cost of doing business, incidence of taxes on exports, government policies, depressed international demand and so on.

“Political situation of the country has little to do with it,” he added. “Political instability or uncertainty has become the new normal in Pakistan and we have factored it in our costs. Same is the case with terrorism. We are already offering our foreign buyers a ‘Pakistan discount’. If, for example, India sells a product for $1 in the international markets we are offering it to the world for $0.95, the better quality of our products notwithstanding.”

In 2015, according to the, Pakistan was placed 192nd out of the 194 countries — just above Yemen and Syria — on the Political Stability and Absence of Violence/Terrorism index. The index “measures perceptions of the likelihood that the government will be destabilised or overthrown in a disorderly manner by unconstitutional or violent means, including politically-motivated violence and terrorism”, and is an average of several other indexes from the Economist Intelligence Unit, the World Economic Forum, and the Political Risk Services, among others.

Recently, one of the two major global rating agencies, Moody’s, kept Pakistan’s rating unchanged at B3, which means investment in Pakistani bonds is highly speculative. The B3 rating is just a notch above the Caaa3 rating, which is assigned to countries with substantial risks for potential investors.

Moody’s had assigned the B3 rating to Pakistan in June 2015 and has not changed it since. It said that domestic politics and geopolitical risk also continue to represent a significant constraint on the rating.

Nevertheless, the businessmen Dawn spoke with did warn of an economic upheaval if the current situation resulted in disruption of daily life and supply chain as a result of protests or violence. “Political stability is important for business environments in economies like ours because it affects investor and consumer confidence,” a multinational company’s CEO, who declined to be named, said. “A stable political setting helps a country maintain a favourable business environment, attract investment and boost consumer spending.”

Ijaz A. Mumtaz, a former president of the Lahore Chamber of Commerce and Industry, argued: “Indeed, our economy is in much better condition today than it was a few years back thanks to falling global oil prices, implementation of the $57 billion China-Pakistan Economic Corridor initiative and borrowed dollars. But at the same time we are only a shock — like a sudden drop in the exchange rate — away from economic chaos.”

Even such an eventuality — the sudden weakening of the rupee — could significantly widen the current account and fiscal deficits, trigger inflation, force interest rates up, and so on as we have borrowed dollars heavily in the recent years to build our reserves, he contended.

“Weak economies like ours with a semblance of economic stability on borrowed money can rarely afford political upheavals. We saw the economy tank in 2007-08 in the wake of the pro-judiciary movement against [retired] General [Pervez] Musharraf. Let’s keep our fingers crossed the history doesn’t repeat itself.”

Political events are just passing matters. But in countries like ours they often leave behind a big mess that takes years to clear.

Published in Dawn, The Business and Finance Weekly, July 17th, 2017



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