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A troubled border: near the Afghanistan- Pakistan frontier |
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Pakistan lost no time in reacting to the terrorist attacks on the US. The Securities&Exchange Commission in Karachi ordered an immediate shutdown of the stock exchange for the first three trading days of the week following the attacks, after the markets went into free fall.
“They realized that Pakistan had once again become a frontline state,” says a banker in Karachi. “The government is clearly bracing itself for short-term turmoil in the financial markets.” So, too, are the financial markets themselves. No sooner had Pakistan’s president, general Pervez Musharraf, announced his decision to back the US war on terrorism than the American Express office in the northern city of Peshawar, near the Afghan border, took down its sign. So far, the markets as well as the mainstream political parties have shown unanimous solidarity with the government’s policy.
“There were concerns about the government’s reaction, but Pakistan’s decision to go along with the US has brought comfort to the market,” says Muneer Kamal, president and CEO of Union Bank. “One doesn’t have to be a rocket scientist to see that there was no scope to do otherwise. People [in the market] wholeheartedly support this decision but one mustn’t underestimate the gravity of the crisis.”
Kamal expresses confidence that the government will be able to handle the situation, but that forging consensus and unity among political forces will be a major challenge. “The real test will be the post-military action scenario,” he says. “Luckily the recent local elections proved that the religious fundamentalist parties don’t have a serious political base.”
Nevertheless, Pakistan’s religious extremist groups are threatening reprisals and the financial community is preparing for the worst. “We have been gearing up for crisis management,” says the CEO of a foreign bank in Karachi. “There hasn’t been any panic yet but people are withdrawing larger amounts than usual. The signs are that this money is being tucked under the mattress or sent abroad.”
Azhar Hamid, chief executive for Pakistan at Standard Chartered Grindlays, recognizes that Musharraf’s decision was not an easy one. “Pakistan had few options, but the fact that the right decision was made helps enormously,” he says. “If we assume that there will be a military strike against Afghanistan by the western alliance, of course Pakistan will suffer. But at the end of the day it’s an ill wind that blows no good. The US knows that we are up to our eyeballs in debt and sanctions and we have thrown in our support behind the west, so hopefully there will be a silver lining for us for taking this stand.”
US secretary of state Colin Powell has talked of fighting a war on many fronts, including diplomatic, military and financial. Pakistan is a country clearly susceptible to financial pressure. Before the attacks the key issue on the agenda for Pakistan was discussions with the IMF over the fourth and final instalment of a $596 million loan and a $2.5 billion World Bank facility. Union Bank’s Kamal believes that the government’s unflinching support for the US has enhanced Pakistan’s ability to successfully wrap up these negotiations at an early date.
However, one of the casualties of the crisis is likely to be Pakistan’s $3 billion privatization programme. The sell-off of state assets is expected to be placed on the backburner for now. United Bank was the first of the major government assets to be put on the block, with an announcement due in the next few weeks. But bankers now believe that foreign bidders, including some financial institutions from the Gulf, will stay away until the dust settles on the situation.
Market sources say Pakistan’s hands are tied until the crisis resolves itself one way or another. “The government is effectively stuck in the fallout from the attacks on the US,” says Nadir Rahman, chief executive officer of stockbroker Khadim Ali Shah Bukhari&Co in Karachi. “This is an undeserved position for us to be in, nevertheless the fact remains that we are in a bind. On the one hand, we do not want to create internal Islamic issues by supporting the US while on the other, it is clear that we cannot turn away the world’s largest economy in its hour of need.”
Rahman foresees two possible medium-term to long-term effects on Pakistan. “The military action takes place or does not take place but Bin Laden and other suspects are handed over to the US for trial,” he says. “In this case the U.S. would ‘owe’ Pakistan and we could reasonably expect economic benefits, which are sorely needed, to accrue to us over the next few years. This might provoke short-term internal terrorism but the economy would improve in due course.”
The second, less pleasant, possibility would be a successful political offensive by Pakistan’s fundamentalist minority, whose influence is believed to extend into the higher echelons of the military. If the fundamentalists prevail and Pakistan is forced to withdraw its support for the US, Rahman foresees a “disastrous” medium-term impact on the economy as Pakistan is shut out by the west.
Rahman expects the equity markets to remain weak for the foreseeable future because the Pakistani market tends to move on macro factors. “The immediate outlook is negative unless there is a significant direct intervention by the government or its institutions and liquidity is provided,” he says.
Two factors lead Rahman to look for a market rally over the next few weeks or months. Technical analysis points to a significant upward trend, he says, and fundamental valuations show significant value for individual stocks. “However, the market will remain weak for the near term due to possible military action and the possibility of internal issues and civil unrest,” he says.
Rahman says that investors have “naturally” been selling short but he has started to detect interest from international hedge funds that are looking to take a chance at the current low levels. “Domestic institutions have also expressed interest at these levels,” he says. “But in general people are holding back until the political and military picture is clearer.”
