Attracting investors to stock, debt markets a challenge

Low-interest rates, rupee depreciation likely to discourage foreign investors

KARACHI:

Pakistan’s economy is gradually moving towards stabilisation. The country’s foreign currency reserves hit a three-year high above $13 billion and the rupee consolidated at around Rs160 against the dollar.

However, attracting foreign investment into the stock and debt markets remains a huge challenge. Foreign investors have continued to divest from Asia’s best performing stock market for the past four years.

Similarly, they have aggressively pulled out investment from government debt securities since March 2020 after the central bank made a big cut in the benchmark interest rate to cope with the Covid-19 pandemic.

In this backdrop, market experts believe that short-term foreign investors may continue to walk out of the domestic markets during 2021 on the back of low interest rates, likely depreciation of the rupee against the US dollar and higher inflation.

They have ruled out the return of foreign investment in government debt securities in the medium term.

A senior analyst, however, voiced hope that the resumption of International Monetary Fund (IMF) loan programme by March 2021 would help attract some foreign investment into the Pakistan Stock Exchange (PSX).

“We expect net foreign selling of around $200-300 million at the stock market next year following the improvement in outlook on the developed stock markets (in recent times),” Topline Research Director Syed Atif Zafar said while talking to The Express Tribune.

He projected foreign investors would initially opt to capitalise on the investment opportunities in the developed markets like the US rather than the emerging markets like the PSX in 2021.

Similarly, 2021 may turn out to be an uneventful year for foreign investors to stage a comeback in the government debt securities like treasury bills and Pakistan Investment Bonds (PIBs).

“Foreigners aggressively divested T-bills and PIBs after the central bank slashed the benchmark interest rate by 625 basis points from MarchJune 2020 to 7%.

The interest rate may remain unattractive for foreign investors (in 2021),” he said.

Net foreign investment in the stock market dropped to almost half at Rs493 billion (approximately 6% of the total value of shares at the PSX ie Rs8,028 billion) on December 18, 2020 compared to all-time high of Rs934.4 billion on January 6, 2017, according to the State Bank of Pakistan (SBP) and the PSX.

Similarly, net foreign investment in the government debt securities slumped to Rs75.3 billion on December 18, 2020 compared to a record high of Rs555.4 billion on February 21, 2020, according to the central bank.

The Planning Commission called on Thursday for a further cut in the benchmark interest rate to boost economic activities and stressed that there was no need for a further rupee depreciation as it had not helped to accelerate exports.

The SBP is expected to make the first increase in benchmark interest rate in May 2021 and may revise the rate upwards by a total of 100-150 basis points in the year.

“The increase in the rate, however, will not be sufficient to re-attract foreign investors to the debt market,” a senior analyst, who wished not to be named, said. He said that even the rate was revised to 8-8.5% in 2021, it would not make a strong case for uplifting foreign investment in the debt securities.

“You can never rule out the possibility of rupee devaluation. On average, the rupee has been depreciating by 4-5% per year.

The likely devaluation will compromise on investment returns on T-bills and PIBs,” he said. “Investment in both the instruments will return only when the interest rate goes into double digit.”

BMA Capital Executive Director Saad Hashmi said resumption of the IMF loan programme worth $6 billion, which had been on hold since the Covid-19 outbreak in February in the country, may encourage foreign investors to renew investment at the PSX. Besides, a long-term stability in the rupee-dollar parity, reduction in inflation and lucrative share prices may help re-attract foreign investment to the PSX, he said.

AHL Head of Research Tahir Abbas said the other day that foreigners were expected to turn net buyers of shares worth $300-400 million at the PSX till December 2021 as they would try to find investment opportunities in relatively cheaper emerging markets like Pakistan.

Besides, they are also expected to invest again in rupee-based government debt securities like T-bills and PIBs.