Devaluation risk weighs on Pakistan market

Foreign reserves are falling, the currentaccount deficit has more than doubled in less than a year

Signs that Pakistan, home to one of the world’s top five stock markets last year, is headed for a currency devaluation is giving investors another reason to stay away from the world’s newest emerging market.

Foreign reserves are falling, the current-account deficit has more than doubled in less than a year and the benchmark KSE100 Index has lost its mojo. Now Moody’s Investors Service has joined the International Monetary Fund, which said last year the rupee is as much as 20 per cent overvalued, in urging the central bank to abandon its grip on the currency and allow more flexibility.

The currency pressure comes as Prime Minister Nawaz Sharif and his family are at the centre of an investigation into alleged corruption. An election next year and the make-up of the country’s borrowing — nearly 31 per cent of outstanding government debt was in foreign currency in the 2016 financial year, according to Moody’s — are adding to the stakes.

“The fiscal position will continue to deteriorate, so we are setting up for a big devaluation at some point,” said Nikhil Bhatnagar, director of Asia sales at Auerbach Grayson & Co in New York. “There will be a policy limbo until next year, until the election is done” even if the prime minister is forced to step down before that, he said.

Bhatnagar, who advises clients on stocks in Asia including Pakistan, forecasts the benchmark index will drop 20 per cent in dollar terms from current levels by the end of 2018.

Pakistan’s finance ministry and central bank didn’t respond to requests for comment.

Battered by the corruption probe and a lack of foreign interest as it was restored to MSCI Inc’s emerging-market gauge last month, the index has already dropped 15 per cent from a high in late May.

Pakistan bonds have also fallen, with the yield on the dollar notes due 2024 rising 36 basis points to 6.13 per cent over the past month.

The KSE100 measure fell 0.6 per cent as of 9:53am in Karachi.