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Is Pakistan Really Heading Towards Default?

We Think Not!

Word on the street is that Pakistan is heading towards default. However, KTrade is bullish on Pakistan and its stock market: we expect stock prices to rise over time, meaning those who invest now could make a substantial profit. (Want to find the best stocks to invest in? Click here) We will be discussing the factors that indicate the country’s ability to avoid a default and maintain a sustainable economic growth trajectory, as well as what investors can do to take advantage of the current situation. To read the full report, click here.

What Is A Sovereign Default?

1200px Old building of State Bank of Pakistan Now its known as State Bank Museum 1

You might be thinking, what does ‘defaulting’ even mean? A ‘sovereign default’ occurs when a nation is incapable of meeting its financial obligations and repaying the debts it owes to lenders. It essentially represents a declaration of bankruptcy on a scale that encompasses an entire country. The repercussions of a country defaulting are profound, impacting its economy significantly and causing substantial damage to its credibility.

Why We Think Pakistan Won’t Default:

We think these factors will save Pakistan from declaring a default:

Manageable Debt

Geostrategic Importance

Manageable Debt Obligations

Pakistan’s external debt stands at around USD 85 billion, which is only around 25% of its GDP. Notably, commercial loans are only 7% of its total debt. We estimate a funding need of around USD 3.0-5.0bn over the next 12 months. We think this gap can easily be managed through controlled external accounts and support from friendly countries.

Geostrategic Importance

Pakistan holds a crucial position as a “Pivotal State” within the global context, especially in relation to China and the US, two prominent global economies. China’s Belt & Road Initiative has made substantial investments in Pakistan, primarily through the China-Pakistan Economic Corridor (CPEC), with the aim of leveraging the country’s trade routes. Additionally, Saudi Arabia has unveiled plans for significant investments in Pakistan, including a refinery valued at $10-12 billion. (Want to know more about the ongoings in the international community? Follow our Facebook page.) Considering the substantial commitments made by these nations to Pakistan, we believe that the probability of Pakistan receiving support funds from them is high.

How to Best Play the Situation?

Pakistan’s equities and international sovereign bonds hold promising investment potential. The benchmark KSE100 index is trading at multiples of 3x, significantly below historical averages. Moreover, Pakistan sovereign bonds are being traded at 30% of their par value. These assets can likely revert to their historical averages once concerns over potential default subside, allowing investors to benefit from a 3x return on their investments. If you want the best investment advice, download KTrade, and become the expert trader you were meant to be!

The Rise of Islamic Banking: What It Means for Investors

Islamic banking, also known as Sharia-compliant banking, has been gaining momentum in Pakistan. With the assets of the Islamic Banking Industry (IBI) reaching Rs 6,902 billion in September 2022, it’s essential to understand what Islamic banking is and its implications for investors.

Islamic banking operates in accordance with Islamic principles and prohibits the charging or paying of interest (riba). Instead, it promotes profit-sharing arrangements, risk-sharing partnerships, and ethical investment practices. This system aims to align financial activities with Islamic values and promote social justice and economic stability.

How Stock Markets Respond to Political Crises: Pakistan in 2023

Supporters of Pakistan's former Prime Minister Imran Khan block a highway, during a protest against his arrest, in Karachi, Pakistan May 9, 2023. REUTERS/Akhtar Soomro REFILE - QUALITY REPEAT

Political crises often coincide with economic uncertainty. Investors begin shying away from stock markets to avoid potential losses. They tend to sell their stocks. Such uncertainty therefore often leads to increased volatility and a decrease in stock prices. A political crisis that is limited in scope and has a clear resolution may have a minimal impact on the stock market. However, a political crisis that threatens the stability of a country or region, such as a coup or civil unrest, can lead to a significant decline in the stock market.

During times of turmoil, the economic landscape usually deteriorates as delays and disagreements derail policy-making. A solid macroeconomic foundation may see the market quickly rebound once conditions stabilize. Countries with strong economies and stable financial systems may be able to weather political crises without significant declines in their stock markets. In contrast, countries with fragile financial systems may be more vulnerable to long-term damages. For detailed reports on Pakistan’s economy, visit our LinkedIn.

Why Are Pakistani Sponsors Buying Back Their Companies?

Buybacks are when companies purchase their own shares in the market, which is often seen as a positive signal for investors. Pakistan stock market is witnessing a sudden influx of buybacks from notable sponsors, likely driven by record-low valuations and high profitability over the past two years. The trend is expected to continue, and we believe it could provide a floor to stock prices. What does this mean, and which industries will be the most affected? Continue reading to learn more.

Buybacks are a way for companies to show confidence in their outlook and signal to investors that they believe their shares are undervalued. When companies buy back shares, it reduces the number of shares outstanding, which increases earnings per share and improves metrics like return on equity. This move can also improve stock prices, as demand for shares increases while the supply decreases.

Investing vs. Saving: What’s the Difference and Why Does It Matter?

Both saving and investing play a crucial role in achieving financial stability and growth. However, many people confuse the two concepts, and as a result, they may not be getting the most out of their money. That’s why KTrade is here to help you understand the difference.

Saving refers to setting aside money for future use, such as putting your money into a savings account. This allows you to build an emergency fund, achieve short-term financial goals, and avoid debt. You then have a financial cushion to fall back on in case of unexpected events like job loss, medical emergencies, or car repairs. Saving also allows you to achieve short-term financial goals like paying for a vacation, or making a down payment on a house.

What’s the Deal with IMF and Pakistan?

Back in 2019, the International Monetary Fund (IMF) and Pakistan reached an agreement to provide financial assistance to help the country address its economic challenges. So far the country has received $4.0 billion out of the total amount of $6.5 billion. For the next tranche of around $1.0 billion, the country has to meet various conditions causing the delay in staff level agreement. As a result, investor sentiment has been negatively impacted, and the market has remained range bound. However, all is not dark! There are ways to navigate these economic uncertainties, and you can do so with KTrade. In this blog post, we’ll take a closer look at the IMF and Pakistan agreement, the reasons behind the delays, and the potential impact on investors and the market.

Firstly, the IMF deal will provide much-needed financial assistance to Pakistan, which has been struggling with a mounting debt crisis. The country’s external debt currently stands at around $105 billion, with the government struggling to meet its repayment obligations. The IMF has agreed to provide a loan of $6 billion to Pakistan over the next three years, which will help to alleviate some of the pressure on the country’s finances. However, as of March 2023, the talks between the government and the IMF appear to be at an impasse amidst an expanding list of conditions, including lending guarantees from friendly countries. Mixed signals from government officials, including planned petroleum and flour subsidies, have fueled speculations of further delays in the program’s revival. Despite this, through the materialization of additional bilateral, multilateral, and IMF’s funding, the government is targeting a reserve balance of around USD 8-9bn by June 30th, 2023. (For those looking for regular updates on Pakistan’s economic climate, follow our LinkedIn and Facebook).