{"id":100179,"date":"2016-12-30T07:48:47","date_gmt":"2016-12-30T12:48:47","guid":{"rendered":"http:\/\/countingpips.com\/?p=100179"},"modified":"2016-12-30T07:48:47","modified_gmt":"2016-12-30T12:48:47","slug":"why-are-pakistans-markets-soaring-really","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2016\/12\/why-are-pakistans-markets-soaring-really\/","title":{"rendered":"Why Are Pakistan\u2019s Markets Soaring, Really?"},"content":{"rendered":"
December 30, 2016<\/div>
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By Dan Steinbock <\/strong><\/p>\n

During six decades of US aid, Pakistan\u2019s living standards plunged. But in the past year, Asia\u2019s largest frontier market delivered foretaste of its promise \u2013 with China\u2019s support.<\/strong><\/p>\n

Recently, Pakistan\u2019s stock market crossed the 46,000 point milestone. Investor sentiment is increasingly bullish. In the past year, Pakistan\u2019s equity markets beat those of China and India by a wide margin. The former was up 16%, whereas the latter were in negative for the year.<\/p>\n

In 2017, the market is expected to see more than half a dozen new initial public offerings, while optimistic analysts anticipate the benchmark index advance to cross 55,000 points, which would potentially generate a yield of 17-21%.<\/p>\n

Pakistan\u2019s market success<\/strong><\/p>\n

Since competitiveness does not seem to explain Pakistan\u2019s market success, Forbes attributes the latter to the country\u2019s role as a frontier market, the inflow of Chinese investment, the World Bank\u2019s support and recent acquisitions.<\/p>

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And yet, rankings in competitiveness index, which tends to measure past success, do not always explain market movements, which are based on future projections.<\/p>\n

Second, the distinction between frontier and emerging markets has less to do with exposure to global markets than with the degree of development, as well as lesser liquidity and greater risk.<\/p>\n

Further, Pakistan has received $1 billion from the World Bank. However, the Bank\u2019s commitments in Pakistan amount to $8.6 billion in the past half a decade and have been substantial for some time.<\/p>\n

What does seem to be relevant, however, is that Chinese companies \u2013 not US firms \u2013 have been behind major acquisitions.<\/p>\n

Something is going on in Pakistan\u2019s markets, but conventional wisdom does not capture the big picture. There\u2019s more to the story.<\/p>\n

Eclipse of US-Pakistan military ties<\/strong><\/p>\n

Recently, Washington suspended $300 million of military aid, after the cancellation of the deal to sell Pakistan eight F-16 fighter jets at a cost of $270 million. Since 2011, there has been a 73% decline in US security assistance and a 53% decrease in economic assistance to Pakistan.<\/p>\n

These moves reflect a major shift. Between 1951 and 2011, US commitments in Pakistan totaled $67 billion; in the subsequent five years, almost $14 billion. Yet, between 2003 and 2015 alone, terrorism took the lives of almost 21,000 civilians and 6,400 security personnel. According to central State Bank of Pakistan, extremist violence has cost the country $118 billion in the past 15 years \u2013 over a third of its GDP.<\/p>\n

Has the military assistance improved ordinary Pakistanis\u2019 living standards? No. Rather, it has gone hand in hand with a dramatic deterioration of living standards. In 1980, Pakistan\u2019s GDP per capita ranked 109th internationally; in 2000, 131st; and today 146th.<\/p>\n

It is this era of military destabilization that is now fading in Pakistan as a new era of economic development is emerging \u2013 which markets have recognized.<\/p>\n

Economic development with China<\/strong><\/p>\n

While significant challenges remain ahead, economy has somewhat stabilized. After the recently completed three-year economic reform program, Pakistan\u2019s real GDP growth is almost 5% – at par with Malaysia (4.7%) and not far from that in Indonesia (5.8%).<\/p>\n

Pakistan also has substantial growth potential. Despite massive amounts of US aid, over 42% of Pakistan\u2019s people remain in agriculture. Almost two-thirds of Pakistanis still live in the countryside, which means that urbanization still has a long way to go – Karachi\u2019s population is likely to increase to almost 20 million and Lahore\u2019s to 10 million by 2025.<\/p>\n

The migration to cities is also fueled by one of the fastest natural population growth rates in Asia. As a result, Pakistan\u2019s cities struggle with capacity constraints in transportation and energy, while migration is occurring amid longstanding war and conflict.<\/p>\n

Fueled by the China-Pakistan free trade agreement, bilateral economic relations have increased rapidly. China is now Pakistan\u2019s largest trade partner and military supplier. And a massive China-Pakistan Economic Corridor (CPEC) is under construction; reportedly, at the cost of $51 billion. CPEC seeks to connect Kashgar and Gwadar, through a network of highways, railways and pipelines. It is an extension of and could become a model of China\u2019s huge One Belt One Road (OBOR) initiative.<\/p>\n

In turn, Chinese investors are acquiring Pakistani companies (e.g., Karachi\u2019s K-Electric by Shanghai Electric Power Co) while the Shanghai Stock Exchange, the Shenzhen Stock Exchange and the Shanghai-based China Financial Futures Exchange seek to buy a stake of up to 40% in the Pakistan Stock Exchange (PSX).<\/p>\n

Second historical effort of modernization<\/strong><\/p>\n

With population estimated at 195 million, Pakistan is the sixth most populous nation in the world and the greatest potential emerging economy in the world after China and India, Indonesia and Brazil.<\/p>\n

The current development craze is not the first one. During the 1960s, Pakistan\u2019s real GDP growth was 6.8%, about the same as China\u2019s today, and the country was a world model of economic development.<\/p>\n

Ironically, as South Korea tried to emulate Pakistan’s economic planning, Pakistan itself failed to implement that model. Now, half a century later, Korea\u2019s GDP per capita is almost $37,000 but Pakistan\u2019s less than $5,000.<\/p>\n

Today, Pakistan is shifting toward economic development. That, however, requires peace and stability and thus minimal friction with regional neighbors \u2013 and the kind of massive infrastructure investment that China can offer. Development matters.<\/p>\n

About the Author:<\/strong><\/p>\n

Dr Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see http:\/\/www.differencegroup.net\/<\/a><\/p>\n

The original, slightly shorter version of this commentary was published by Global Times on December 21, 2016.<\/p>\n

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By Dan Steinbock During six decades of US aid, Pakistan\u2019s living standards plunged. But in the past year, Asia\u2019s largest frontier market delivered foretaste of its promise \u2013 with China\u2019s support. Recently, Pakistan\u2019s stock market crossed the 46,000 point milestone. Investor sentiment is increasingly bullish. In the past year, Pakistan\u2019s equity markets beat those of […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-100179","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/100179","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=100179"}],"version-history":[{"count":1,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/100179\/revisions"}],"predecessor-version":[{"id":100180,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/100179\/revisions\/100180"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=100179"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=100179"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=100179"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}