No single party can form govt in forthcoming election: report

• PTI can acquire 99 seats while PML-N can clinch 72 seats in lower house
• AKD report says PTI, PPP coalition in center not unlikely

KARACHI: No single party is likely to win an absolute majority to form government at the center, said AKD Securities report released before the July 25 polls on Wednesday.

The Pakistan Tehreek-e-Insaaf (PTI) can acquire 99 seats of the lower house against 27 won in 2013, while Pakistan Muslim League-Nawaz (PML-N) is expected to win 72 lower house seats against 142 won in last elections out of the total 272 contested general seats, the report said.

In this backdrop, the report said two broad scenarios emerge as an outcome: In first scenario, PTI leads the coalition with support from nationalist parties along with independents and in second scenario, the PTI and Pakistan People’s Party (PPP) together lead the coalition with support from provincial/ethnic parties and independents.

The AKD report further said that PML-N may lead coalition with the support from PPP considering they could bond together under a common persecution theme along with provincial parties and independents.

Regardless of the outcome in the upcoming election, the report does not expect deviation in key themes: end to end consensus on the benefits of CPEC and broader economic reforms and end to end consensus on National Action Plan (NAP) and the combating of extremism, terrorism and corruption within Pakistan.

Fragmentation within PML-N’s senior ranks and traction of Imran Khan led anti-graft movement and accountability drive have given PTI wider national support, it said.

At the same time, the report quoted that the PTI can also optionally band together with provincial and urban centric ethnic parties i.e. the PPP and MQM – though optically negative, given how PTI Chairman Imran Khan’s anti-graft rhetoric has targeted mainstream political parties’ leaderships time and again.

For the PML-N to avoid the opposition benches for the next five years depends on whether the report sees the ongoing prosecution against graft intensify bringing within the fold senior leaderships of mainstream parties – the risk of unification under a common persecution theme.

PTI leads the coalition:

For the PTI, a coalition with independents and nationalist parties is optically positive and legislatively effective, the report said. The PTI should be able retain its hallmark and implement its broader agenda of governance, sustainable economic growth through reform implementation and human development. The PTI led coalition government in KP has implemented a reform program for civil institutions which has resonated with wider national vote banks. As for foreign policy, PTI’s stance with the US is expected to be on a parallel footing leaning towards a nationalist agenda while overtures towards China should still be pursued, the report observed.

PTI-PPP led coalition:

As a bannerman for the ongoing anti-graft campaign, a PTI coalition with the PPPP though negative optically and legislatively challenging is a scenario that cannot be completely ruled out and can become increasingly likely post-election, the report claimed. An unofficial collaboration to appoint the leader of the house in the Senate election (March’18) supports this case.

Reforms requiring provincial backing adverse to the PPP’s rural vote bank can risk keeping the relationship from being amicable at the center.

With regards to civil-military relations, the PPP has habitually acted out at times but is generally quick to fall back in line, it further claimed.

Economy – a challenge for the incoming government:

The macroeconomic environment faces headwinds in the context of buildup in inflationary pressures (expected to be adjusted through interest rate hikes – cumulative hike of 175bps through CY18TD) and stress on the external front. SBP FX reserves estimated to shrink to 1 month of import cover by FY19-end due to poor visibility on inflows will likely lead to re-entering the fold of the IMF, the report said.

Encouragingly, the program should immediately focus on stabilization measures and advancing structural reforms but faces challenges that require corrective legislation from the center.

Post a financing facility, currency devaluation is likely to be limited, also in line with historical trend. However, a prolonged delay in adequate inflows can keep the currency under pressure where market forces pushing the Pak-Rupee beyond our estimated currency parity of Rs133/US$ during FY19F cannot be ruled out.

Investment Perspective:

At current price level, valuations have become increasingly undemanding – KSE-100 fwd P/E (7.24) at 27.5 per cent discount to the last 3-year average of 9.99x and 37.6 per cent discount to the MSCI EM-ex Japan Index. The report recommends thematic exposure in banks, oil & gas exploration, textiles and power.