KARACHI: The single biggest risk to investment in the equity and debt capital markets is the macroeconomic threat of an uncontrollable fiscal deficit, according to economic analysts at several of the country’s largest investment banks.
Economists at BMA Capital, JS Global and KASB Securities are in agreement that the country cannot sustain economic growth unless the federal and provincial governments limit their deficits.
In reports issued to clients over the past week, each of the leading investment banks remained cautiously optimistic about investments in equities, but warned that the country would have to face up to the reality of the gaping fiscal deficit soon or else face dire consequences. “The recovery’s momentum hinges on fiscal reforms,” wrote Hamza Marath, an analyst at KASB Securities, voicing an opinion that has echoed across the financial services sector over the past few months. Others went even further.
“We continue to support the need for fiscal tightening, as opposed to monetary, since the latter has proven futile in offsetting high government borrowing thus far,” said Muzammil Aslam, economist at JS Global Capital. As a result, despite extraordinary increases in profitability at some of the leading KSE 100 index companies, economic growth for the year ending June 30, 2011 is not expected to exceed two per cent.
There are, however, causes for optimism. The current account has held up a surplus rather than the deficit that caused a sharp decline in the value of the rupee in 2008. The current account is a measure of a country’s balance of payments that is calculated as the difference between the value of its exports and inward remittances and its imports and outward remittances.
Most analysts agree that the rupee is likely to remain relatively stable over the next two years, largely on the back of US coalition support funds and continuous flow of remittances from Pakistani expatriates.
However, 2012 is seen as the year when the government may once again begin to face pressures as repayments of foreign debt become due, likely causing a significant decrease in the foreign exchange reserves and a corresponding increase in the current account deficit. This, in turn, may once again put pressure on the value of the rupee, causing the currency to lose value.
Marath of KASB Securities suggests that the government must resolve the fiscal crisis by the end of the fiscal year in June or else face with an even worse crisis similar to the one in 2008.
Published in The Express Tribune, January 25th, 2011.