PTI to edge ahead of PML-N: Credit Suisse reports on its research

-Imran Khan may need to enter into an alliance with the PPP

KARACHI: Pakistan Tehreek-e-Insaaf (PTI) is to edge ahead of the Pakistan Muslim League-Nawaz (PML-N) in the upcoming elections with an expected 92 seats against 73 expected seats of PML-(N) 73 (27%), said Credit Suisse, Zurich-based global financial services and equity research company.

According to the rating company, the 2018 elections appears to be a straight fight between the Centre Right and outgoing ruling party, PML-N and the main opposition, Centrist party PTI.

The company report said the PTI to bag 92 seats in the National Assembly (NA) and eye a 60 per cent probability of the party forming a coalition government. PML-N may secure 73 seats, Pakistan Peoples’ Party (PPP) may get 34 seats in NA, while Muttahida Qaumi Movement-Pakistan (MQM-P) eight seats, Pak Sarzameen Party (PSP) five seats, Jamiat-e-Ulema Islam-Fazal (JUI-F) eight seats, independent candidate 24 seats and Grand Democratic Alliance (GDA) and others may secure 28 seats in the forthcoming elections to be held on July 25.

Imran Khan may have to look towards the PPP to shore up the numbers, but the odds of this are low, only 5 per cent. That said, the PML-N can secure 73 seats that are 27 per cent on our assessment; and in the event that the PTI fails to stitch together an alliance, can put forward its own coalition.

“We do not expect a simple majority on either side, however, the PTI to edge ahead,” Credit Suisse said in its report released on Tuesday night.

In a best-case scenario, the company eye a PTI-led coalition forming the government with support from parties in Karachi and Balochistan and collaboration with independents.

This would provide the PTI with an ideal platform to implement its reform agenda. We also see a 15 per cent chance that Imran Khan may need to enter into an alliance with the PPP in order to shore up the numbers in case the first scenario wavers, the report added.

However, this would pose challenges to the sustainability of the setup due to friction with the PPP leader, Asif Zardari, the report claimed.

In the event that Imran Khan is unable to cross the magic number of 137 seats and exhausts his ‘first right to form the government’, the PML-N could step forward with a coalition comprising the PPP and a few smaller parties and independent candidates (25% probability), the report claimed.

This alliance may be stable if the PML-N and PPP stick to governing in their own backyards (Punjab and Sindh respectively) while maintaining cohesion at the centre.

The rating agency said, “the verdict is likely to negatively impact the PML-N’s election momentum, with the biggest beneficiary being Imran Khan who has campaigned aggressively on tackling corruption, stemming money laundering and curbing tax evasion.” The only scenario where PML-N could benefit from the verdict would be if the Sharifs are able to galvanise supporters at the time of his arrest and lead the last leg of his party’s campaign after obtaining bail, the report claimed.

While no single party looks to be in a position to attain a majority, the electoral prospects of the PTI (led by former cricket-team captain Imran Khan) have brightened since the ousting of the PML-N leader Nawaz Sharif and his subsequent sentencing.

The report said that the winning party will have to knock on the IMF’s doors is very likely, in our view, with a Stand-By Arrangement (similar to 2008) being a possible option. Pakistan would need funds of at least 3-5x its quota ($9-14 billion) to provide an adequate buffer to the external account.

Beyond this, the PTI would need to take concrete measures on taxation and institutional reforms in the first 100 days of its tenure, to maintain the confidence of markets. The report expects the PTI to usher in relief measures for the agricultural space, grant incentives for exporters and inject funds in the energy sector.

What could the parties bring to the table?

The PTI is a strong proponent of institutional reforms, crackdown on corruption and revenue mobilisation. We expect higher allocations towards education, healthcare and housing sectors. On foreign policy, Imran Khan has hawkish views towards the US and will lean more towards China and Muslim-majority countries, while domestically it will stay on the same page as the military establishment. The PML-N’s operating model will be development-focused but will lag on SOE and tax reforms. Elsewhere, the PPP has a poor track record on economic management and is firmly opposed to privatisation.

Macro situation is reminiscent of 2013

Amidst a record high current account deficit (11M FY18 US$ 15.9 bn: +43% YoY) and eroding forex reserves ($9.8bn; 1.9 months of import cover), we see a rising need for a bailout package from the IMF. Similar to 2008, a Stand-By Arrangement can be sought with upfront disbursements to alleviate the stress. Pakistan would need to secure funding of at least 3-5x its quota (amounting to $9-14 bn) in our view, the report said.

Alongside, we expect the Fund to attach strict conditions on exchange rate flexibility, a firm roadmap towards tax revenue mobilisation, restructuring of SOE’s and energy sector reforms. Monetary tightening is also anticipated to continue with another 75-100 bp hike likely in the next 6-9 months as the second-round impact of oil prices and currency adjustment filter through to CPI.

Equities to welcome a strong mandate

We expect the market to cheer a strong PTI or PML-N showing with a 10-15% rally as a decisive mandate is essential to implement much needed economic reforms to restore macroeconomic stability. Fertilizers, energy, banks and textiles should benefit. A split mandate resulting in a hung Parliament remains a key risk leading to further political turmoil and making it difficult for the new government to take adjusting measures. We see the market correcting a further 10-15% in such a case. Our base case scenario remains a PTI led coalition and we see an 8-10% rally post-election. Beyond this, the PTI would need to take concrete measures on taxation and institutional reforms in the first 100 days of its tenure to maintain the confidence of markets. We expect the party to introduce relief measures for the agricultural space, grant incentives for exporters and inject funds in the energy sector. We keep our year-end index target of 47,000 points intact implying 20% upside. Our top picks are MCB, EFERT, ENGRO, LUCKY and UBL. Key risks are worsening security situation and street agitation leading to a delay in holding elections.

Battle of Punjab: PML-N and PTI are neck-to-neck

With 141 seats (52%) out of 272 directly elected seats in the National Assembly (NA), Punjab remains by far the most important province in the country and has always had an import bearing on federal government formation. Barring the 2002 general elections under the military regime of General Pervez Musharraf, PML-N has dominated the province since the 1990s with consistently strong showings in the Central and Northern parts of Punjab (which have a higher concentration of urban centres as compared to the South.

We forecast the PML-N to bag 67 seats and the PTI to secure 57 seats in contrast to 2013, we expect a much closer contest between PML-N and PTI in 2018.

The former has weakened considerably due to the (1) lifetime disqualification of Nawaz Sharif from contesting elections, (2) defections of a large number of lawmakers to the PTI from the Southern party of Punjab and (3) flexible stance being adopted by PML-N workers to contest independently rather than under the party’s umbrella.

We have conducted a comprehensive seat-wise analysis on the basis of the background of candidates contesting each seat, historical track record in elections and political/social lineage. Our analysis still points to the PML-N remaining the single largest party in the province albeit with a lower tally of 67 seats, with PTI a close second at 57 seats marking a significant progress after a poor result in 2013 (6 seats). Representation from other parties and independent candidates in Punjab can be limited to 17 seats, in our view (down from 22 seats in the previous election), however, these representatives can serve as king-makers at the time of negotiations for a coalition government.

The PML-N still holds a robust vote bank in Punjab. It drew the largest electorate in the 2013 elections (14.8 mn voters) which were almost double that of the PTI (7.7 mn voters). Moreover, the party has broadly delivered on its election promises to invest heavily in infrastructure and has also completed mega transportation projects (Orange Line Metro Train in Lahore and Metro Bus in Multan). Performance on electricity generation has also been commendable as a coal IPP in Sahiwal (1,200 MW) has been set up along with three LNG-based plants in Punjab (combined capacity of 3,600 MW).

Sindh: PPP and MQM to lose seats to PTI and PSP

Sindh is the second largest province with 61 seats (23%) in the National Assembly. The province has remained a stronghold of the PPP which has ruled for two consecutive terms (2008-13 and 2013-18). Our seat-wise analysis indicates that the PPP can potentially lose 7 seats from the rural areas and gain 2 seats from Karachi, bringing its total tally to 29 seats (34 in 2013).

Defections of a couple of senior leaders along with the consolidation of anti-PPP parties under the GDA can raise competition. Besides this, the MQM has seen its grip on Karachi erode since 2013 (when it won 17 out of 20 seats in the city). The report expects the PTI to improve its footing due to the weakening of the MQM and also due to the PTI’s ability to draw votes from the middle and upper-class societies.

The newly formed PSP under the leadership of former Karachi mayor, Mustafa Kamal can also bag 4 seats from Karachi.

PTI to further solidify its position in KP province

Khyber Pakhtunkhwa (KP) is the third largest province with 39 seats (14%) in the NA. It was a key beneficiary of the delimitation exercise post the 2017 census with the addition of four seats. PTI emerged as the largest party in the 2013 elections when it secured 16 seats (46% of total) and ran the provincial government in a coalition for five years (its first ever shot at governance). The party looks to have performed well during this course with most opinion polls indicating it has strengthened its footing in the province.

We expect it to gain more ground in the 2018 elections and anticipate a victory on 24 seats (62%) at the expense of regional parties such as the JUI-F and ANP.

Latest opinion polls show a close overall race

The recent poll conducted by Gallup Pakistan in June 2018 saw a neck and neck tie between the PML-N (26%) and PTI (25%). As per the results of the survey, the PML-N’s popularity has dropped sharply from May levels when the party polled at 38%. In another poll conducted by the Pulse Consultant, the results illustrated that PTI has surpassed PML-N by garnering 30% of voters relative to 27% for PML-N. Both surveys were uniform in assigning a 15-17% popularity to the PPP keeping the party in third place.