Elections 2013: A turning point for politics at a crucial time for the economy
Given its emergence as a third major force and recent upswing in its popularity as suggested by polls, Pakistan Tehreek Insaaf (PTI) will bethe key catalyst in deciding the outcome of elections on 11th May. The extent of its success on election day will determine which party forms the government. This note aims to chalk out three possible outcomes and outlines the impact on the macro economy in each case.
Scenario A; PTI wins less than 50 seats: In scenario A, where PTI wins less than 50 seats (out of a total 270), it will mainly displace the incumbent Pakistan People’s Party Parliamentarians (PPPP) and pave the way for a Pakistan Muslim League – Nawaz (PML-N) led coalition government.
Scenario B; PTI wins 50-80 seats: PTI registering a considerable win of 50-80 seats would lead to prolonged post election uncertainty as none of the major parties would end up with enough seats to lead a coalition. This shall be a short term negative for capital markets as it would delay the new IMF program and can cause PKR devaluation, given precarious reserves situation. However, likelihood of currency free fall seems minimal.
Scenario C; PTI wins greater than 80 seats: In the least likely yet possible Scenario C, PTI would win over 80 seats and would be in a position to form a coalition setup. While this may weaken sentiments of local investors initially, as PTI may reverse the capital gains tax amnesty scheme effective since Mar-12, overall optimism shall override the negativity given that a PTI led government would be highly welcomed by foreign investors.
Market impact: We stick to our conservative Dec-13 KSE-100 index target of 20,400 and await further clarity from key upcoming events - elections, FY14 budget and progress on the IMF program. Our base case factors in an uncertain 2HCY13. Formation of PTI led or PML-N led coalition governments would both jack up sentiments and lead to re-rating.
Scenario B is the key risk: Prolonged post election uncertainty shall not be an ideal situation for Pakistan's economy. IMF repayments and expected BoP deficit during May and June ' 13 would reduce FX reserves by USD1.3bn to USD5.4bn or 1.6 months of imports by Jun-13. This can lead to exchange rate and stock market volatility. However, USD1.6bn cross currency swap with China would lend support.
Stock selection even more important: We continue to like E&Ps, IPPs and textiles due to dollar linked revenue streams, given high likelihood of weak PKR ahead of and through the upcoming IMF program. IPPs stand to be more defensive due to their high yields. Top picks include PPL, OGDC, POL, HUBCO, KAPCO, NML, LUCK, ENGRO and KOHC.http://www.elixirsec.com/Research/Elections%202013.pdf?utm_source=Research%2BReports&utm_medium=Email&utm_campaign=BellDownload