The real impact of Nawaz Sharif’s disqualification
What no one was talking about in the media was the long-term economic impact of political instability
Nawaz Sharif. PHOTO: REUTERS
Most of the reactions on social media on the disqualification of former prime minister Nawaz Sharif by the Supreme Court seemed to only focus on politics. For a lot of people in the online Pakistani community, the concern was primarily the corruption charges, and they cheered the decision of the Supreme Court.
While news and social media was busy, the markets started showing jitters. In fact, ever since the investigation on Panama Papers scandal began the market took a dip of 17 per cent. The KSE-100 had already seen a lot of volatility this year, partly due to the listing of Pakistan Stock Exchange (PSX) in the MSCI Emerging Markets Index.
What no one was talking about in the media was the long-term economic impact of political instability. The incident reiterated once again that, rather than the voters removing the Pakistani PM, judges, bureaucrats, the military establishment and even assassinations have done that job. To say that the international credit rating agencies, the IMF and the MSCI are not watching this event closely is being too naïve.
Who will succeed Sharif? MPs decide today
Despite the PSX not getting the weightage that they wanted in MSCI-EM Index (0.10 per cent rather than the expected 0.19 per cent), political stability, a clean handover of the democratic reign from the Pakistan People’s Party to the Pakistan Muslim League-Nawaz (PML-N) and the ambitious plans/reforms promised by this government, was the primary factor that drove the inclusion. It was also the reason for the IMF to be cautiously ‘optimistic’ about the country.
Pakistani economy for now is being propped up by a lot of debt. Whether it was the multiple bailouts from the IMF or Chinese state-owned enterprises investing through the China-Pakistan Economic Corridor, Pakistan needs ‘at least’ 4-5 per cent of consistent GDP growth for the next two decades to tide over any possibility of a mega-default.
Keeping aside the opinions on political parties, ideologies or political struggle within Pakistan, what is worrisome is that if the nominated PM, Shehbaz Sharif, faces similar scrutiny due to the Panama Papers case or any other case and is weakened or worse removed before his term ends, there will be a backlash from international investors. There may be a possibility that rating agencies might downgrade Pakistan Government Bonds negatively impacting the ability of the state to raise funds to bridge fiscal deficits.
Too much debt is a toxic mix with political instability, which will put pressure on Pakistan’s currency leading to more depreciation. The MSCI-EM might also reduce their exposure to Pakistani stocks in their kitty, especially bank stocks.
A game of thrones in Pakistan's dynastic politics
Chinese investments are a whole different ball game, as there is no public data available on what rate of returns or sovereign guarantees the Pakistan government has promised to their Chinese counterparts. It’s difficult to comment that, but one can safely guess it will be on the higher side.
There is no political party in the National Assembly, which can stand up to the majority that the PML-N holds. Holding another elections and if it brings a hung National Assembly that might trigger a market panic.
In short there are no real good choices. The best strategy will be to take the least painful path. Pakistan’s political leaders will have to be careful; they have too much at stake to gamble.
Published in The Express Tribune, August 1st, 2017.
While news and social media was busy, the markets started showing jitters. In fact, ever since the investigation on Panama Papers scandal began the market took a dip of 17 per cent. The KSE-100 had already seen a lot of volatility this year, partly due to the listing of Pakistan Stock Exchange (PSX) in the MSCI Emerging Markets Index.
What no one was talking about in the media was the long-term economic impact of political instability. The incident reiterated once again that, rather than the voters removing the Pakistani PM, judges, bureaucrats, the military establishment and even assassinations have done that job. To say that the international credit rating agencies, the IMF and the MSCI are not watching this event closely is being too naïve.
Who will succeed Sharif? MPs decide today
Despite the PSX not getting the weightage that they wanted in MSCI-EM Index (0.10 per cent rather than the expected 0.19 per cent), political stability, a clean handover of the democratic reign from the Pakistan People’s Party to the Pakistan Muslim League-Nawaz (PML-N) and the ambitious plans/reforms promised by this government, was the primary factor that drove the inclusion. It was also the reason for the IMF to be cautiously ‘optimistic’ about the country.
Pakistani economy for now is being propped up by a lot of debt. Whether it was the multiple bailouts from the IMF or Chinese state-owned enterprises investing through the China-Pakistan Economic Corridor, Pakistan needs ‘at least’ 4-5 per cent of consistent GDP growth for the next two decades to tide over any possibility of a mega-default.
Keeping aside the opinions on political parties, ideologies or political struggle within Pakistan, what is worrisome is that if the nominated PM, Shehbaz Sharif, faces similar scrutiny due to the Panama Papers case or any other case and is weakened or worse removed before his term ends, there will be a backlash from international investors. There may be a possibility that rating agencies might downgrade Pakistan Government Bonds negatively impacting the ability of the state to raise funds to bridge fiscal deficits.
Too much debt is a toxic mix with political instability, which will put pressure on Pakistan’s currency leading to more depreciation. The MSCI-EM might also reduce their exposure to Pakistani stocks in their kitty, especially bank stocks.
A game of thrones in Pakistan's dynastic politics
Chinese investments are a whole different ball game, as there is no public data available on what rate of returns or sovereign guarantees the Pakistan government has promised to their Chinese counterparts. It’s difficult to comment that, but one can safely guess it will be on the higher side.
There is no political party in the National Assembly, which can stand up to the majority that the PML-N holds. Holding another elections and if it brings a hung National Assembly that might trigger a market panic.
In short there are no real good choices. The best strategy will be to take the least painful path. Pakistan’s political leaders will have to be careful; they have too much at stake to gamble.
Published in The Express Tribune, August 1st, 2017.