Pakistan: Impending Growth Story

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Includes: PAK
by: Bader Al Hussain

Summary

Improvement in the Corruption Perception Index.

Improvement in macroeconomic indicators.

CPEC a game changer for the region.

In this article, I would state the reasons for investing in Global X MSCI Pakistan ETF (NYSEARCA:PAK), though I agree with some SA contributors that ETF is not always a reflection of country's economic performance. But, we can use it as the only available proxy to have an exposure in another economy.

First of all, I would briefly discuss the culture of Pakistan. Unlike the picture presented in the media or the comments of my previous article, Pakistan has a vibrant culture. This country has produced the first female fighter pilots in South Asia and has the highest representation of females in the parliament when compared to other South Asian countries. For further information on culture, read the article published in The Huffington Post.

Secondly, though the corruption is widespread in Pakistan, the situation has improved as the country's rank has been upgraded in the recent report of Corruption Perception Index (CPI) of Transparency International. The progress is minimal; however, given the trajectory of improvement, I see there is a light at the end of the tunnel.

Moreover, below mentioned are few points representing current picture of macroeconomic situation of Pakistan and my future expectations from every indicator:

  • GDP growth has inched up to 5% after increasing at an average of 3.38% in the last five years. The World Bank forecasts a growth rate of 5.5%. One of the major constraint in the jacking-up of growth is severe electricity load shedding in Pakistan. However, the incumbent government is serious in tackling this issue, maintaining that the problem would be resolved within next two years (read CPEC about the details of power projects) as numerous power projects are coming online by the end of 2017. According to renowned economists, if the issue of load shedding is resolved, it would be having an incremental effect of 1.5%-2% on the GDP growth of the country, meaning Pakistan could grow at a pace of 6%-7% per year.
  • CPEC (China-Pakistan Economic Corridor) is the real game changer for the economy of Pakistan. It is an economic corridor having a length of thousands of miles, crossing through Pakistan into China. During the first phase of the project, Pakistan would receive an investment worth $46 billion from China. The time frame in which all the projects are to be executed spans from 8 to 10 years. Following are the projects that are to be completed under CPEC, these below-mentioned proposals also include the power projects that are on the priority list of the government:




(These above images are the courtesy of the Planning Commission of Pakistan)

  • Further, record low inflation coupled with historical low interest rates due to falling oil prices has increased the purchasing power of the common Pakistani middle class population.
  • Current account deficit shrank by 23%, owing to plummeting oil prices and rising remittances, though amidst tumbling exports. I expect Pakistan to benefit substantially from lower oil prices. Going forward, exports would remain a cause of concern for the government.
  • Pakistan's foreign exchange reserves have risen to $20.3 billion, increasing the import cover of the country to ~5 months
  • Dwindling budget deficit from 8.4% of GDP in FY13 to 5.3% of GDP in FY15, increasing fiscal discipline of the government. Going forward, the World Bank is expecting fiscal deficit to reduce to 3.5% of GDP as presently the deficit is ~4.5% of GDP.

Nevertheless, the only material obstacle in the way of CPEC project is the potential turbulent law and order situation in the western route of this corridor. But, given the seriousness of the government together with the Army, it has decided to raise one division of security force commanded by Major General to protect this western alignment. Recently, COAS (Chief of Army Staff) of Pakistan visited the headquarters of this newly raised force. In my analysis, given the sincerity of the stakeholders involved, the CPEC would be a success not for Pakistan, but for region.

The sectors that would immensely benefit from the CPEC are steel, cement and automobile. Thus, it is my recommendation for investors to have exposure in Pakistan's equities through the available investment vehicles such as Global X MSCI Pakistan ETF. However, I must caution that it is high risk, high return opportunity. Therefore, I must advise that the potential investor must have investment horizon of more than 2 years.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.