Pakistan Stocks Surge Most in 15 Years After IMF Loan Deal

Pakistan experienced a remarkable surge in its primary stock index on Monday, marking the largest increase in 15 years. This remarkable upturn followed the nation's successful negotiation of an initial $3 billion loan agreement with the International Monetary Fund, effectively alleviating concerns about a potential default.

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Pakistan Stocks Surge Most in 15 Years After IMF Loan Deal

Upon resuming trading after the three-day Eid holiday, Pakistan's benchmark KSE-100 Index rose so significantly that it triggered an hour-long halt early in the session. By the close, it had soared by 6.2%, representing the most substantial gain since 2008.

This dramatic recovery is a direct result of the preliminary accord reached with the IMF the previous week, which provided a lifeline to Pakistan amid its worst-ever economic crisis. The country has been grappling with astronomical interest rates, soaring inflation, and mounting taxes and energy prices. In January, in order to meet the IMF's critical demands, Pakistan allowed its currency to weaken, resulting in a depreciation of over 20% this year, making it one of the worst-performing currencies globally.

Ruchir Desai, a fund manager at Asia Frontier Capital Ltd. in Hong Kong, remarked that the IMF arrangement instills confidence in investors regarding Pakistan's ability to manage its short-term external repayments. He further predicted that the market should thrive in the coming weeks.

The injection of financial support from international lenders has not only boosted investor confidence but also enhanced returns across struggling emerging and frontier markets. Countries such as Kenya, Tanzania, Senegal, Ukraine, Ghana, and Ivory Coast have already received approved or disbursed funds, while other African nations like Egypt and Mozambique anticipate the imminent approval of their loan requests.

Furthermore, Pakistan's market is benefiting from attractive valuations. Despite recent negative headlines encompassing political upheaval, the risk of a debt default, and a weakening currency, the KSE-100 Index has become the most attractively priced equity benchmark worldwide.

Ali Raza, the head of international equities trading at BMA Capital in Karachi, emphasized the exceedingly cheap valuations, suggesting substantial room for a rebound in the market.

As a reflection of the positive sentiment, Pakistan's dollar bonds have also surged, with the paper due in 2024 experiencing a 17 cent increase over the past week. The 8.25% 2024 bond rose by 3.1 cents, trading at 73.6 cents on the dollar on Monday, a level last observed approximately a year ago in August. These gains follow a record-breaking week for dollar bonds. The currency market in Pakistan will open on Tuesday.

Additionally, encouraging economic indicators contribute to the favorable conditions. Pakistan's inflation rate eased in June for the first time in seven months, with borrowing costs at a record high curbing demand, and lower commodity prices decelerating price inflation. Data released by the Pakistan Bureau of Statistics reveals a 29.40% increase in consumer prices in June compared to the previous year, slightly below the median estimate from a Bloomberg survey. This is a welcome relief following the record-breaking 37.97% surge observed in May.

Pakistan Stocks Surge

Pakistan Stocks Surge news

Nevertheless, challenges persist. Pakistan faces external debt obligations of approximately $23 billion in the upcoming fiscal year, which is more than six times the nation's foreign exchange reserves. With reserves standing at a mere $3.5 billion, covering less than a month's worth of imports—below the global benchmark of three months—the country's capacity to fund imports, including raw materials, has been severely limited, resulting in the suspension of operations for numerous factories.

The IMF bailout undoubtedly alters the landscape for Pakistan, according to market observers. Barclays has upgraded Pakistan's debt to market weight following this development. Moody's Investor Service also expects the agreement to unlock support from bilateral and multilateral partners, enabling the nation to fulfill its high external debt repayments as analyst Grace Lim noted in an email.

"This positive rally marks a historic occasion, resulting in the first-ever market halt," declared BMA's Raza. "Today is a monumental day for Pakistan's equities."

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