JS Securities Limited - JS Research.

Karachi -- January 26, 2023 (PPI-OT)

Macro adjustments inevitable - Prefer resilient stocks

Limited choices on path to recovery - politics can derail timing

Pakistan - marred with political noise tethers on the verge of financial crisis and PSX at ~3x CY23E earnings reflects the fear. The turn of the year has brought nascent expectation of a rebound with the help of IMF and friendly countries. The path will be non-linear and require multitude of macro / policy adjustments. As things stand, given the lack of options, market will likely absorb cost of the reforms if they bring clarity on flows - but politics remains a key spanner, as it can derail the pace of execution.

Stop gap measures underway - further adjustments inevitable

Fundamental challenge has been 'urge to splurge' i.e. tendency to stretch both fiscal and C/A every few years - for populist growth. Any bottle neck in funding of 'growth beyond means' triggers tightening of ambitions. In CY22, the challenge was exacerbated by politics where uncertainty dried up funding quicker and populist ambitions delayed rolling back of excesses.

Political outlook is still murky but macro options are limited and irrespective of faces which execute it, pre-requisites of recovery entail corrective fiscal (higher taxes, subsidy removal i.e. market based energy pricing), external (market-based exchange rate) and monetary measures (higher interest rates to curb demand), where stop gap measures are already in play.

Boxing the uncertainty in numbers

While timing remains unclear, incorporating painful measures in 3QFY23, 2HFY23 CPI is likely to average ~27%, in our view. This would gradually regress over high base factor, averaging at 13% in FY24. On the fiscal side, slippages are expected, taking fiscal deficit to 7.6% of GDP. Simultaneously, monetary tightening is likely to continue in 3QFY23.

On the external front, CAD may...