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Pakistan Politics: Likely Market Response on Election Outcome

 

• Only two working days are left until people of Pakistan (registered voters 105mn vs. 86mn in 2013) decide the fate of the next Government. While the wind is blowing in PTI's direction (led by cricketer-turned politician Imran Khan), the upcoming poll remains the most toughest and tightly contested election in Pakistan’s history, as per observers and political experts.
• In today’s note we discuss possibilities of different political scenarios and the likely market reaction soon after the election. We believe one of following scenarios can unfold on 25th Jul 2018: 1) PTI grabs 85-95 seats and form a coalition with smaller parties and independents (this is our base case scenario with 75% probability), 2) PML-N grabs 80-90 seats and form a coalition with PPP, smaller parties and independents (this scenario has a 25% likelihood) and 3) PTI and PML-N get less than 80 seats (least likely).
• In the first scenario where PTI manages to get 85-95 seats, there will likely be a coalition with smaller parties and independents. Market may react positively as this outcome is expected to lead to a stable Govt. in terms of getting along in Govt. and economic policies, we believe.
• In case of a second scenario, PML-N will form a coalition with PPP, smaller parties and independents. The immediate reaction of the market will be negative as former PM and PML-N party head Nawaz Sharif has called the upcoming general elections a referendum against his disqualification. However, since Shahbaz Sharif (current PML-N head) has taken a more accommodating stance, market may react positively in the long run if PML-N, PPP and state institutions decide to resolve their differences.
• If both PTI and PML-N grab less than 80 seats, market will negatively react as there will be a brief confusion as to who will form the next Govt. Both parties will need the support of PPP, smaller parties and independents to form a coalition.
• While international media and independent observers have raised their concerns over fairness of the upcoming poll, people’s choice on D-day remains the single most factor in determining who will form the next fortress.
• Some recent surveys opine a tightly contested election between PTI and Pakistan Muslim League-N (PML-N). This is in tandem with our view published in the report titled, 'PTI Likely To Lead the Electoral Battleground', dated 2 Jul, 2018, where we highlighted PTI and PML-N to be in a close race with 75% probability of PTI forming the Govt.
• However, we believe that whoever forms the next Govt., initial thirty days post elections will be of tremendous pressure as the new Govt. will have no choice but to enter IMF’s bailout program owing to worsening current account situation. To note, Pakistan’s Current Account Deficit (CAD) settled at US$18bn in FY18, up 42% YoY. Moreover, foreign exchange reserves declined to US$9bn as of 13 Jul 2018 (less than 2-month import cover) while fiscal deficit is anticipated to touch 7% in FY18.
• The IMF-supported program is anticipated to come with austerity measures which the new Govt. will have to take. These measures include but may not be limited to 1) hike/rationalization in power and gas tariff, 2) cut in Govt. spending/subsidies, 2) tax increases and 3) further monetary tightening & currency devaluation that will likely hamper the aggregate demand (GDP growth is expected to clock-in at 4.7% in FY19 vs. 5.8% in FY18).