DUBAI: The current balance of payments
crisis in Pakistan evoked my memories of visiting Argentina as a Chase
Manhattan derivatives banker in the 1990s. Domingo Cavallo’s artificial peso
peg against the US dollar led to a currency collapse, banking failures and
political chaos (five Presidents in a single year!). The analogy with the
abandonment of Pakistan’s rupee peg in
early 2018 is unmistakable. The scale of monetary mismanagement in Pakistan
ensures a systemic external debt meltdown in 2019. Why?
Pakistan’s
PMLN Prime Minister Nawaz Sharif maintained an inflated rupee peg against the
dollar in 2013-17, enabling my tribe of offshore investors to enjoy 25 percent
plus US dollar returns in the stock exchange for three successive years, among
the highest in the world. Pakistan spent $7 billion in Central Bank
intervention to keep the rupee inflated against the US dollar in order to
facilitate the elite’s capital flight and fondness for subsidized luxury
imports. Yet I slashed my Pakistani equities exposure to zero the moment
Pakistani’s Supreme Court, inspired by the Rawalpindi GHQ’s Praetorian cabal,
dismissed Nawaz Sharif for his alleged weakness for Mayfair luxury flats (Bad
strategy call on Curzon and Duke Street, as Brexit proved). From my experience
in Argentina, I knew the new government, whoever it was, would be forced to
succumb to a free float FX regime with a draconian rupee devaluation and an IMF
bailout. This meant a bloodbath on the Karachi stock exchange.
History
vindicated my July 2017 strategy. The Karachi stock index (PSX) is down 25
percent from its 52,000 peak. The Pakistani rupee has plunged from 105 in early
2018 to 140 as I write. The new PTI government in Islamabad is clueless about
how to communicate with Wall Street, the reason $300 million in offshore smart
money has dumped Pakistani equities since Imran Khan took office in July 2018.
Imran
Khan claims he learnt about the latest rupee devaluation on television.
Apparently, Finance Minister Asad Umar, briefed well in advance by the governor
of the central bank, had failed to inform his boss and his consort, the djinn
juggling Pinky Pirni. Worse, Imran Khan sternly ordered his central bank
governor to clear all rupee decisions in advance with him, a violation of the
1956 State Bank Act, basic monetary policy norms and his own PTI manifesto.
Whatever else Imran Khan learnt from his third division PPE degree at Keble
College, it was definitely not economics.
What
next? China and Saudi Arabia have failed to bail out Pakistan at a time when
external debt is a staggering $95 billion, debt service is 30 percent of the
Federal budget and the state’s hard currency reserves are a pitiful one month’s
import cover. The State Bank’s forecast for 4.9 percent GDP growth in 2019 is a
cruel joke, given that the monetary mandarins of Karachi raised the policy
interest rate by 350 basis points to 10% in 2018.
As
inflation soars, another 200 basis point rise in the policy rate is inevitable
in 2019. The Trump White House will insist on a renegotiation of opaque Chinese
project debts, higher taxes and fiscal austerity as a precondition for an IMF
bailout, with the rupee at 160 – 180 at least. The US, the Gulf states, India,
Russia and even Iran do not want Gwadar to morph into a Chinese naval gateway
on the Arabian Sea. After all, my birthplace Karachi has been Sind’s preeminent
port for millennia and generates a staggering 25 percent of Pakistan’s GDP.
Pakistan’s
deep state must realize that tanks and armoured personnel carriers run on
petrol, whose prices will skyrocket as the rupee plunges against King Dollar.
Rawalpindi must downsize its quest for “strategic depth” in Afghanistan and
Kashmir. My call? Economic growth falls below 3 percent, hitting PTI’s urban
vote bank of the young and the restless the most. Pakistani financial assets
will be gutted by the cancer of inflation. Imran Khan’s visceral, anti-US
populism has no antidote to an economy bereft of rational, pro-growth,
pro-market policy blueprints.
Pakistani
shares trade at 6.2 times forward earnings and 7.4% dividend yield, optically
cheap but a classic value trap as the macro storm clouds darken and corporate
earnings estimates decline. I believe the Karachi stock index (PSX) can fall to
28 – 30,000, 25% below current levels. The exodus of foreign money is thus
rational. 2019 will be the year of living (and trading) dangerously in Karachi.
(IPA Service)
The writer is
the Chief Investment Officer& Partner at Dubai-based Asas Capital. He
advises ultra-high net worth royal and family offices in the UAE on global
equities markets and foreign exchange.
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