Don’t squander this opportunity

Morgan Stanley Capital International (MSCI) has identified Pakistan as an emerging market on its MSCI Emerging Market (EM) index as Pakistan Stock Market (PSX) has performed the best in Asia region this year. This means for Pakistan an upgrade from Frontier Market (FM) to EM which will give a significant boost to the economy of Pakistan and its perception.

Pakistan will be reclassified by MSCI on a general consensus and the upgrade from FM to EM will come into effect in May 2017 semi-annual index review. The mainstream emerging markets such as China and other Asian-African countries inclusive of South Africa’s have not performed well last year on account of uncertainty. Global economic slowdown and low oil prices have jolted global markets. As per reports of global analysts, investors are looking for alternatives, finding markets that are less correlated to the US interest cycle and the China macro slowdown. The analysts view Pakistan as one of the outstanding spots where the market is doing quite well as the valuations there are the lowest in the region. After MSCI report release on May 17, it is estimated that Asia’s best performer could attract as much as US $220 million of inflows.

Federal Finance Minister Ishaq Dar congratulated Prime Minister Nawaz Sharif and the nation over this achievement while addressing the National Assembly recently, adding that the inclusion will have a positive impact on the country’s economy and the investment being made in the country. Minister Ishaq Dar and the nation have reasons to celebrate this remarkable achievement. After around eight years of a struggle against a sluggish economy, things appear to be shaping up for the better and there are positive indictors and ground realities to add to one’s optimism.

Pakistan’s stocks hit a record high of 38,559 after the country’s stock market was upgraded overnight. Pakistani brokerages upgraded their outlook on the market and expect the main index to rise above 40,000 by year end. Research analysts estimate the upgrade could result in about US $400 million in inflows into Pakistan’s stock market by passive tracker funds alone. After the stock exchange imposed a floor on the market during the financial crisis of 2008, the exchange enforced a number of market and structural reforms to regain the trust of the investors mainly that of Foreign Portfolio Investment (FPI).

FPI is a pull through for Foreign Direct Investment (FDI); these complement each other as both are all about country’s perception, performance and ground realities. Country’s perception and performance have improved and so have ground realities. There are now promising conditions to rope in FDI and FPI.

Arcelik A.S., Turkey’s largest industrial conglomerate with a strong global presence, announced last week $258 million acquisition of Dawlance Pakistan – a market leader in home appliances. Engro Corporation has signed an agreement with Friesland Campina, a leading global Dutch dairy company, on the sale of 51 percent shareholding in Engro Foods to this company at an estimated price of $448 million.

Both these foreign investors plan to integrate the acquisition with their overall outlook to feed global markets and local market. They are reported to be encouraged with Pakistan’s GDP growth of over 4.5% and the domestic market driven by one of the world’s largest and growing young middle classes demanding a better life; further, they view the strategic location of Pakistan as close proximity to the new emerging markets in Central Asia and around. Foreign investors’ confidence appears to be coming back and they have started to look at Pakistan as an interesting market to be in.

As per a saying: “Investors are like a flock of birds on a tree. You scare them – they all fly away. To bring them back you need to get the first few; the rest will follow on their own”. Pakistan needs the first ten to make it happen. With all these positive indicators there are many serious challenges which could undermine achievements. Much has to be done to sustain the status of Emerging Market Index. The Pakistani companies that are likely to be part of the list, as per MSCI, include those in the private sector and public sector such as Oil and Gas Development Company Ltd (OGDCL), Pakistan State Oil (PSO), Habib Bank and MCB Bank. Of importance is the conduct of public sector business enterprises. PSO, for a long time, enjoyed the status of being among the 500 Fortune companies of the world. Bad governance of this state enterprise made it lose this distinction. OGDCL had the potential to be rated among 500 Fortune companies but could never make it largely on account of poor governance. The governance of all the core organisations has to be ramped up for growth and returns. We need many good performers to retain the status.

For the sustainability of economic excellence the growth in FDI and exports is an important ingredient. State organisations, both at the national and provincial levels, are passive in their conduct. The net FDI in FY12-13 is reported to be around $1.5 billion and in FY15-16 it is only around $2 billion. Pakistan’s exports are also on a downward trend with $25 billion in FY13-14, $23.7 billion in FY14-15 and are expected to be even lower in FY15-16.

The successful implementation of the IMF programme added to the investor confidence. This IMF programme will end in September 2016. Not only is the government required to retain investor confidence, it is also needed to maintain PSF index. The China Pakistan Economic Corridor (CPEC) is of significant value for economic excellence and strategic interests of Pakistan. Its successful and timely implementation is the single most important challenge for Pakistan.

The other most important and dangerous challenges are the building up of the political turmoil, which if allowed to spin out of control may wipe out all the economic and financial gains much to the disadvantage of the citizens of Pakistan and much to the advantage of the negative forces inimical to the interests of the people.

The offer made by Finance Minister Ishaq Dar to the political parties to agree on a “Charter of Economy” has merit. The people of Pakistan expects from political parties to demonstrate wisdom and patriotism to make this happen. They may pursue their political ambitions without denting the economy of the state as the economy belongs to the people of Pakistan.