CEO / Partner
TUNDRA FONDER AB
When we decided to launch a Pakistan dedicated mutual fund the first precondition – and that is far from a given one in most of the world’s equity markets – was that we could. Pakistan is a well functioning equity market suitable for a daily traded mutual fund. There is no need to dilute the exposure with other markets from a liquidity standpoint as is the case in most frontier markets. In addition disclosure standard as well as corporate governance is excellent by emerging market standards. When we are asked to describe the investment case in a few words we say that Pakistan has a similar starting point as many African countries but with financial and legal structure in place that makes it possible for you as an investor to actually take advantage of it.
Outlook for external factors have improved and are likely to improve further. Oil prices are in our view very unlikely to repeat the fivefold rise from the last ten years and with the revival in textile exports combined with continued strong remittances the current account balance is improving. In addition the security political situation can only improve post US exit from Afghanistan in 2014. A large number of direct investments are currently reviewed by foreign investors. With FDI on its way the outlook for Pakistan ’s balance of payment is quite promising, from a structural point of view.
In the next 24 months Pakistan will however face a cash flow problem that needs to be adequately handled. Currency reserves are currently just above USD 13,5 billion and, despite benign oil prices, growing textile exports and improving remittances, this reserve is still drained by USD 300 million monthly due to the still complete absence of foreign direct investments. Adding repayments to the IMF of USD 5 billion in FY 13-14 Pakistan faces a real risk of a similar currency crisis as in 2008. Regardless of how undervalued the rupee might be a currency’s value is ultimately defined by the trust investors have in holding it. This trust will be gone by the end of 2013 unless a credible bridge financing plan is presented. A devaluation does not solve anything for a country which is not freely competing in world export markets and whose current account deficit primarily comes from a structural deficit of energy. The only result will be a rapid increase in inflation (just as in 2009) and foreign investors, still only peeking inside, shutting the door.
Now to the good thing and the reason why we are still optimists. Everyone knows. With the 2008 crisis just a couple of years backthis is the main risk discussed by foreign investors today and most likely, or rather hopefully, among economic policy makers of the different political fractions. Regardless of which coalition takes control post 2013 they should understand the urgency of the matter and realize that this is no time for long negotiations and political prestige. The anger of the people when subsidies are eliminated will be nothing compared to the rage unleashed if the price of food suddenly jumps 30% overnight. Sit down with the IMF. Play their game and be polite. Your time will come.
As earlier discussed the preconditions are in place for Pakistan to enter a new era of growth and show at least part of the true potential that was always there. To whoever takes charge post 2013 elections we simply ask – Don’t stumble on the only remaining obstacle.