‘Tough IMF conditions better than no deal’

Published October 23, 2021
The International Monetary Fund (IMF) logo is seen at the IMF headquarters building in Washington. — Reuters/File
The International Monetary Fund (IMF) logo is seen at the IMF headquarters building in Washington. — Reuters/File

KARACHI: Stockbrokers are holding their breath while the government locks horns with the International Monetary Fund (IMF) over the stalled loan programme.

The benchmark index of the Pakistan Stock Exchange (PSX) barely inched up in the outgoing week because of the inordinate delay in the agreement, which will lead to the release of a $1 billion tranche against promises of belt tightening and reforms.

“There’s too much uncertainty. What happens next in the stock market depends largely on the conditions that the IMF will impose on Pakistan,” said Mohammed Sohail, CEO of Topline Securities.

The likely outcome of the ongoing talks in Washington DC will be an “agreement with tough conditions,” he added. “Aggregate demand will go down. There’s going to be fiscal and monetary tightening. The growth phase will turn into stabilisation, heralding a growth rate of 3.5-4 per cent as opposed to the targeted 5pc,” he said.

Analysts expect a bull run at least in the banking and energy sectors after the resumption of the IMF programme. Two of the likeliest IMF conditions are an increase in the benchmark interest rate and the resolution of the energy sector’s circular debt.

The former will boost the income of banks while the latter will free up liquidity and improve cash flows in the energy sector. “The auto sector is going to be the biggest loser. Demand for cars will go down as automakers rely heavily on imported parts,” said Mr Sohail, adding that steel and cement sectors will also have a “slightly negative impact” amid higher inflation and subdued demand.

In the worst-case scenario — no agreement with the IMF as opposed to agreement/deferment — he said the impact on the macro-economy and the stock market will be unimaginably bad.

Speaking to Dawn, AKD Securities Senior Investment Analyst Shahrukh Saleem said the agreement with the IMF will come into effect sooner or later. “News flow suggests the concessions extended to different sectors in the last budget will likely be withdrawn. One good thing that’ll come out of the early conclusion of the talks is the immediate support to our currency. The rupee may actually appreciate against the dollar,” he said.

As for the stock market, Mr Saleem said no sector is going to take a hard hit in the long run when the country re-enters the IMF programme. It will induce clarity and certainty, especially with respect to the exchange rate, he added.

FATF review

In a separate note to investors, AKD Securities analyst Hamza Kamal said on Friday the latest review by the Financial Action Task Force (FATF) will be a “non-event” for the stock market.

The intergovernmental organisation set up to curb money laundering recently announced retaining Pakistan among jurisdictions under “increased monitoring” — otherwise known as the grey list.

Instead of the FATF review, he said, the “tone” in the stock market will be defined by the recommencement of the IMF loan in the near term.

“We advise accumulation in banks (on monetary tightening), followed by the construction sector (on the possible normalisation in input costs with upbeat demand) and textiles (on currency devaluation),” the note said.

Published in Dawn, October 23rd, 2021

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