Karachi, July 03, 2023 (PPI-OT): A new IMF agreement - a positive start to FY24

Pakistan secures US$3bn IMF SBA

While KSE100 Index closed flat for the year with -0.2% returns, it ended at a positive note pertaining to macro direction of the country. Pakistan has secured a new IMF program under a Stand-by Arrangement (SBA) worth US$3bn for the next nine months, subject to approval by the IMF Executive Board, with its consideration expected by mid-July. The development comes in line with our note released on the last trading session before the Eid break highlighting governments recent increased efforts to close a deal with IMF.

The development came as Pakistan's EFF under IMF expired on 30th June, 2023, while its import cover stands at less than a month. The last program expired with only 8 out of 11 tranches disbursed worth ~US$4bn, leading to government's efforts towards attaining the remaining US$2.5bn through a fresh program. The SBA has given the government space to execute the electoral process that is scheduled in the next four months (Oct-2023).

This would also address unlocking disbursements from other global lenders at a time when the central bank has foreign exchange reserves only sufficient to finance its expected Current Account Deficit for the next 12 months, while the country's external debt obligations for the same time stands at US$23bn.

Execution of reforms remain crucial

As we had highlighted that IMF's nod remained key to calm market nerves, the new arrangement is expected to boost investor confidence, at least in the near future. Extended market rally and unlocking of valuations would likely be subject to execution of reforms yet again highlighted by the Fund, which include reforms in the energy sector, control on inflation and fiscal discipline.

The KSE100 Index continues to trade at attractive multiples of sub-3x, pricing in lower investor confidence, which we believe was due to delay in a deal with IMF. We highlight energy stocks such as OGDC, PPL, SNGP and MARI would garner interest. In addition, we prefer UBL, BAFL, MEBL, HMB, BAHL and MCB as picks from the banking sector amid attractive valuations. We also prefer the Cement sector with MLCF, PIOC and KOHC among picks. Moreover, we also recommend Pharma sector amid talks on drug price increase, where we reiterate AGP among top picks.

Federal Budget FY24's ambitious targets

Federal Budget FY24, was another key development this month, which was announced in the second week of June, came with tall revenue targets and even taller expenditure allocations., keeping fiscal deficit targets relatively realistic at 6.5% of GDP. While broad tax measures have been pinned to the Corporate sector, further changes post Budget announcement would likely revise the fiscal deficit target to 6.3% of GDP.

Taxes reinstated on Bonus shares also led to companies rushing to reportedly pre-announce Bonus issues that were likely scheduled with Jun-end results. During Jun-2023, 17 companies announced interim Bonus issues ranging from 10% - 200%.