By Matein Khalid
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)
Matein
Khalid 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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