Post-Brexit: What it means for the Pakistani economy

Textile and auto sectors will be impacted in the near term, negotiations will determine way forward, say stakeholders

KARACHI: In another sign that Pakistan’s exports will continue to tumble, some analysts as well as stakeholders are fretting over UK’s decision to exit the European Union, saying that the development is more negative than it is neutral for the economy.

Pakistan’s stock market tumbled over 1,400 points in the aftermath of UK’s historical referendum, with textile and auto sectors bearing the brunt of the decision.

The plunge came amid expectations that Pakistan’s exports, majority of which are textile-related, will plummet to the European Union (EU) after UK exits the 28-nation trading bloc.

However, at a time when world’s markets are reeling with uncertainty, some analysts say the negative impact emanating from Brexit will be comparatively less for Pakistan’s economy as it is relatively insulated from global markets. The reason is that Pakistan’s exports are only 7% of the country’s total Gross Domestic product (GDP).

However, since the EU is the largest trading partner of Pakistan, exporters are concerned that political uncertainty in Europe, depreciation of the euro and the pound sterling may slow down their exports even further in the coming months. A weaker euro and pound sterling makes Pakistan’s exports relatively expensive, causing demand to drop, while a slowdown in foreign economies is also likely to result in declining imports.



 



Textiles

Meanwhile, the Pakistani textile community is looking to pause, take a deep breath before jumping on conclusions for the long term.

“I don’t know what to say at this moment, pound sterling and the euro have taken a big hit and this will certainly hurt my exports in the short term as well as long term,” said Multinational Export CEO M Babar Khan, whose company exports most of its knitwear to the EU.

Khan, who has two textile factories in Karachi, said that a lot will depend up on how the UK and Pakistan negotiate over duties once the UK leaves the EU.

The EU awarded the Generalised System of Preferences (GSP) Plus status to Pakistan in December 2013 for the next 10 years, which has already helped the country in adding over $1 billion per year in its exports since January 2014. Exporters are worried whether Pakistan will receive the same benefits once Britain exits the EU.

However, since Pakistan has good political relations with the UK and the country also supported Pakistan’s case within the EU in gaining GSP Plus status, some exporters believe Pakistan will succeed in getting the same duty concessions from the UK.



The textile sector will be affected as a weaker pound sterling and the euro (down 2.3% in a single day) will render Pakistan’s exports more expensive, Topline Securities reported on Friday.

Out of total Pakistan’s textile exports of $11.6 billion during the first 11 months (Jul-May) of current fiscal year 2015-16, textile exports’ share to the UK was $1.2 billion (10%).

Leather

Over 10% of Pakistan’s total exports to the EU come from its leather sector. There are some concerns of slowdown in the EU markets, but there is no panic.

“We have some concerns because we believe political upheaval in Europe may hit Pakistan’s leather exports in the EU. But it may not be that severe because there is already a slowdown in EU’s leading markets,” Pakistan Tanners Association (PTA) Chairman Gulzar Feroz told The Express Tribune.

“Now that Pakistan will have to negotiate duty concessions with the UK, we would urge the UK authorities to consider Pakistan’s interests and allow it to export its products comparable to the GSP Plus arrangements,” said Feroz.

Auto

The Brexit resulted in global markets coming crashing down with pound sterling and the euro taking a massive hit. On the other hand, safe havens like the yen and gold appreciated significantly. The appreciated yen was trading at 101.9 against the dollar, up by 3% as of yesterday. The yen also appreciated about 3% against the Pakistan rupee on Friday.

In this photograph taken on July 25, 2015, people gather around vehicles parked in a car showroom in Quetta. PHOTO: AFP

“This will be negative for local auto sector as portion of their costs are denominated in the yen,” according to the Topline Securities report.

Invest & Finance Securities CEO Muzammil Aslam commented that Pakistan will face some impact of the Brexit in terms of imports and exports.

“There is uncertainty everywhere and this is expected to continue. The very fact that the pound sterling and the euro are depreciating is enough to know that Pakistani exports to the UK and the EU will take a hit in coming months,” he added.

Gold price increases 3%, will continue to rise

The price of the precious metal increased 3% overnight in the local market, as Britain decided to leave the European Union.

With the sterling undergoing the biggest one-day drop of over 10% against the dollar, international investors turned to safe-haven assets, thus increasing the gold price 5.3% to over $1,326 per ounce in one day.

As a result, the local price of gold surged Rs1,500 to Rs50,200 per tola (11.6 grams) in just 24 hours, according to All Sindh Saraf and Jewellers Association (ASSJA).

Speaking to The Express Tribune, ASSJA President Haroon Rashid Chand said gold prices are expected to keep rising in the next few weeks. “The sterling is losing value … people want to avoid volatility in the currency market. Gold prices will gain strength in the near future,” he said.

Gold’s consumer demand in Pakistan in the first three months of 2016 recorded a major increase on a year-on-year basis, according to statistics on global gold demand released by the World Gold Council (WGC).

It clocked up at 9.4 tonnes in Jan-Mar, showing an increase of 12% from consumer demand of 8.4 tonnes in the same quarter of the preceding year.

Consumer demand of gold consists of two major categories: jewellery demand and total bar and coin demand. The year-on-year increase in the country’s consumer demand for the Jan-Mar quarter in each category was 13.2% and 9.6%, respectively, according to WGC.

Pakistan’s share in the global consumer demand of gold is miniscule. With world consumer demand at 735.8 tonnes in the first quarter of 2016, Pakistan’s share was less than 1.3%. Given the small size of the Pakistani gold market, local prices are determined largely in line with global trends.

“I expect the gold price to hover around $1,400 per ounce by the end of 2016,” Chand said.

Stocks tumble as textile, auto, oil take beating

In a sign of increasing interconnectedness with the rest of the global economy, the Pakistan Stock Exchange (PSX) took a hit on Friday following Britain’s decision to leave the European Union (EU).

Stockbrokers look on during a trading session at the Pakistan Stock Exchange (PSE) in Karachi on June 24, 2016. PHOTO: AFP

Brexit-induced panic selling on the Karachi bourse resulted in the benchmark index shedding 848 points, down 2.2% from a day earlier. After losing over 1,400 points in early trading, the KSE-100 Index recovered some losses to close at 37,389.88.

The decision of the United Kingdom (UK), which constitutes about one-sixth of the economic output of the EU, to quit the economic bloc will have a direct impact on at least two sectors of the Pakistan economy: automobile and textiles.



As a consequence of Brexit, the sterling lost its value against major currencies, including the Japanese yen. A stronger yen will hurt the earnings of auto companies listed on the Pakistani bourse because they import some of their auto parts from Japan.

Similarly, publicly traded textile companies will also take a hit as a result of Brexit. Textiles constitute more than half of Pakistan’s exports, with the EU being one of the major destinations of Pakistani products. Investors expect export-oriented listed companies in the textile sector to take a hit going forward, as a cheaper sterling will make Pakistani exports less competitive in the UK.

According to Intermarket Securities, Friday was the worst day of 2016 underpinned by broad-based selling in oil and exploration, auto, cement, banking, fertiliser, multi-utility, steel, textile, glass, power and pharma sectors. “Major contribution to downside came from MCB, OGDC, PPL, HBL, UBL, Engro and PSO,” it said in a research note.

However, it noted that the effects of Brexit will only be at the micro level. “We don't think Brexit changes the Pakistan story. MSCI rerating has yet to take place,” it said while referring to the recent upgrade of Pakistan from the frontier to emerging market status by global index provider.

According to AKD Securities, concerns in the form of a potential pull-out by foreign investors remain. However, it said favourable local macros relative to other emerging markets are going to restrict the downside.

Elixir Securities also believes that Brexit does not have any major implications for Pakistan’s fundamentals. “Despite minimal bearings on Pakistan’s fundamentals, concerns of liquidity flows are likely to drive the index in the short term… redemptions and realignment of global funds could likely result in foreign outflows,” it said.

Trade volumes increased 108.4% to 236.8 million shares compared with Thursday’s tally of 113.6 million shares.

Shares of 341 companies were traded. At the end of the day, 44 stocks closed higher, 276 declined while 21 remained unchanged. The value of shares traded during the day was Rs15.3 billion, up 131.5% from Thursday.

K-Electric Limited was the volume leader with 24.1 million shares, losing Rs0.14 to finish at Rs7.76. It was followed by WorldCall Telecom with 15.2 million shares, gaining Rs0.37 to close at Rs1.96 and Dewan Cement with 13.1 million shares, gaining Rs0.42 to close at Rs14.84.

Foreign institutional investors were net sellers of Rs506.1 million during the trading session, according to data maintained by the National Clearing Company of Pakistan Limited.