Pak-US fiasco and its impact on economy

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The renewed diplomatic strain between Pakistan and the United States, two strategic partners in the global war against terrorism, has started unfolding its ‘negative bearing’ on the former’s ailing economy with the terrorism-hit nuclear-armed nation’s already volatile equity and money markets bracing for major shocks. Analysts believe that future implications of the aggravating entente between Washington and Islamabad that includes economic sanctions might put “additional pressure” on Pakistan’s fragile economy with rupee likely to see worst depreciation against the greenback. The escalated tension between the two non-Nato allies Monday played havoc with the investors’ sentiments at Karachi Stock Exchange, the country’s largest equity market, making the 100-share index benchmark dipping head-on by over 400 points during the initial trading. “(The) stocks fell sharply lower at KSE as investors react to (the) US pressure and allegations against Pakistan army and ISI,” viewed a director at Arif Habib Investments, Ahsan Mehanti.
The opening day of the week saw KSE 100 index shedding some 341.83 points or 2.95 per cent to close at 11,265.03 points against 11,606.86 of Friday. The market capital at KSE also shrank by over Rs88 billion to Rs2.972 trillion, compared to Rs3.06 trillion of the previous trading last week. According to Mehanti, the investors remained concerned over Pak-US relations as well as the release of US economic and security aid after US officials’ allegations on Pakistan’s spy agencies for support of Haqqani network despite hopes for favorable policy announcement by the State Bank on the 7th of next month. The Asian markets’ slide, uncertainty in global markets on unresolved Europe debt crises and fears on global economic situation affected the sentiment are other reasons the analyst cited for Monday’s slump. Another market observer, Hasnain Asghar Ali of Aziz Fidahusein and company, said, “Rollover pressure was indeed the straw that broke the camel’s back.”
Mohammed Sohail, chief executive officer of Topline Securities, believes that the US is Pakistan’s major trading partner and the nature of relations enjoyed by the two countries would play a decisive role in setting the tone for local stock market for the rest of 2011. The analyst was of the opinion that the post-OBL scenario had put Pak-American ties in ‘considerable strain’ with Obama administration inflicting economic punishments upon Islamabad in the face of $800 million military aid that includes $300 million of war reimbursements under the $1.3 billion annual Coalition Support Fund (CSF). “Strained relationship with Pakistan’s largest export market (approximately 18 per cent contribution to export) and biggest donor ($21 billion since 2001), could have a negative bearing for Pakistan’s economic health,” said Sohail. The analyst said keeping in mind the negatives like reduced foreign inflows, uncertainties surrounding Islamabad’s relationship with the International Monetary Fund, trade balance being faced with adverse commodity price shock and the non-availability of US funding under CSF would exert “additional pressure” on Pakistan’s current account that is witnessing a deficit of $189 million during first two months of the current financial year, FY2012.
About the impact on the currency and equity markets, Sohail said, the heightened tension could result in “more than desirable” Pakistan rupee depreciation against the greenback as well reduction of liquidity in the secondary market. “The global sell-off in stocks and commodities bodes ill for Pakistan market that has been one of the best performing market in Asia after Sri Lanka so far in 2011,” he observed adding “the recent tension in relationship with US is another negative for Pakistan market that trades at 2-year low PE of 5.9 with dividend yield of 8 per cent.” On the currency front, strained relationship with the country’s largest trading partner and biggest donor, pose a major risk to country’s external account which is already faced with commodity price shock and the IMF’s SBA scheduled loan repayment of $1.2 billion, the analyst said. “This in turn could escalate the country’s current account deficit from our initial target of 1-1.5 per cent of GDP, thus rendering into more than desirable rupee depreciation against the greenback,” he opined. With many things, however, still unclear, the analyst said, at the moment one should keep his/her “base-case assumption” of current account and 4-5 per cent rupee depreciation against the dollar intact. “Any sort of economic sanctions may have a major impact on local currency, we believe,” Sohail said.