Pakistan General Elections 2018 Update

Transcription

1 Pakistan Equity Strategy July 20, 2018 REP 057 Pakistan General Elections 2018 Update Likely Market Response on Election Outcome Nabeel Khursheed AC Tel: Topline Securities, Pakistan Best Local Brokerage House Brokers Poll , Best Local Brokerage House

2 Immediate market reaction on election outcome Only two working days are left until people of Pakistan (registered voters 105mn vs. 86mn in 2013) decide the fate of the next Government. While the wind is blowing in PTI's direction (led by cricketer turned politician Imran Khan), the upcoming poll remains the most toughest and tightly contested election in Pakistan s history, as per observers and political experts. In today s note we discuss possibilities of different political scenarios and the likely market reaction soon after the election. We believe one of following scenarios can unfold on 25th Jul 2018: 1) PTI grabs seats and form a coalition with smaller parties and independents (this is our base case scenario with 75% probability), 2) PML N grabs seats and form a coalition with PPP, smaller parties and independents d (h (this scenario has a 25% likelihood) and 3) PTI and PML N get less than 80 seats (least likely). In the first scenario where PTI manages to get seats, there will likely be a coalition with smaller parties and independents. Market may react positively as this outcome is expected to lead to a stable Govt. in terms of getting along in Govt. and economic policies, we believe. In case of a second scenario, PML N will form a coalition with PPP, smaller parties and independents. The immediate reaction of the market will be negative as former PM and PML N party head Nawaz Sharif has called the upcoming general elections a referendum against his disqualification. However, since Shahbaz Sharif (current PML N head) has taken a more accommodating stance, market may react positively in the long run if PML N, PPP and state institutions decide to resolve their differences. If both PTI and PML N grab less than 80 seats, market will negatively react as there will be a brief confusion as to who will form the next Govt. Both parties will need the support of PPP, smaller parties and independents to form a coalition. Pakistan Politics 2

3 Three possible outcomes and likely market reaction Election day outcome PTI Grabs PML N Grabs Both PTI & PML N Grab Less than 80 Market Reaction Positive Negative Negative Pakistan Politics 3

4 Nerve racking competition between PTI & PML N While international media and independent observers have raised their concerns over fairness of the upcoming poll, people s choice on D day remains the single most factor in determining who will form the next fortress. Some recent surveys opine a tightly contested election between PTI and Pakistan Muslim League N (PML N). This is in tandem with our view published in the report titled, 'PTI Likely To Lead the Electoral Battleground', dated 2 Jul, 2018, where we highlighted PTI and PML N to be in a close race with 75% probability of PTI forming the Govt. However, we believe that whoever forms the next Govt., initial thirty days post elections will be of tremendous pressure as the new Govt. will have no choice but to enter IMF s bailout program owing to worsening current account situation. To note, Pakistan s s Current Account Deficit (CAD) settled at US$18bn in FY18, up 42% YoY. Moreover, foreign exchange reserves declined to US$9bn as of 13 Jul 2018 (less than 2 month import cover) while fiscal deficit is anticipated to touch 7% in FY18. The IMF supported program is anticipated to come with austerity measures which the new Govt. will have to take. These measures include but may not be limited to 1) hike/rationalization in power and gas tariff, 2) cut in Govt. spending/subsidies, 2) tax increases and 3) further monetary tightening & currency devaluation that will likely hamper the aggregate demand (GDP growth is expected to clock in at 4.7% in FY19 vs. 5.8% in FY18). Pakistan Politics 4

5 Analyst Certification and Disclosures The research analyst(s), denoted by an AC on the cover of this report, primarily involved in the preparation of this report, certifies that (1) the views expressed in this report accurately reflect his/her personal views about the subject and (2) no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. Further, this report is based on information and views from sources that are considered reliable. Research Dissemination Policy Topline Securities endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely manner through either physical or electronic distribution such as , fax mail etc. Nevertheless, all clients may not receive the material at the same time. Disclaimer This report has been prepared by Topline Securities and is provided for information purposes only. While reasonable care has been taken to ensure that the information contained therein is not untrue or misleading at the time of publication, we make no representation ese as to its accuracy acy or completeness e ess and it should oud not be relied eedupon as such. This report is provided po dedonly for the information of professional advisers who are expected to make their own investment decisions without undue reliance on this report. Investments in capital markets are subject to market risk and Topline Securities accepts no responsibility whatsoever for any direct or indirect consequential loss arising from any use of this report or its contents. In particular, the report takes no account of the investment objectives, financial situation and particular needs of investors, who should seek further professional advice or rely upon their ownjudgment and acumen bf before making any investment. t Further, the views expressed in this report are those of Topline Research Department and do not necessarily reflect those of Topline or its Directors. All rights reserved by Topline Securities. This report or any portion hereof may not be reproduced, distributed or published by any person for any purpose whatsoever. Nor can it be sent to a third party without prior consent of Topline Securities. Action could be taken for unauthorized reproduction, distribution or publication. Pakistan Politics 5