By Harris Parvaze
Pakistan Stock Exchange witnessed a dream run in 2016. Towards the later stage of the year, the country’s benchmark index KSE100, rallied 27% to become Asia’s best performing stock market. MSCI declared Pakistan’s reclassification from the Frontier Market status and include it in its Emerging Market Index May 2017 onwards.
Where is Pakistan headed?
Federico Parenti, a Milan-based Fund Manager, told Bloomberg that he plans to allocate 10% of his funds to the country. He wrote,
The prospect is bright: with the growing young population and the rising middle class. I want a piece of your economy — a piece of your frozen food, a piece of your cement, and a piece of your hospitals.
However, the best opportunity within the country does not lie with its getting upgraded in the MSCI index. Instead, it lies with everything that is unnoticed. The lack of media attention, when it comes to any economic performance, is the most valuable thing that an investor can ask for.
But what really led to Parenti telling Bloomberg that he plans to allocate a substantial portion of his fund to a country which is continuously fighting battlegrounds on lines of terrorism and political instability? Taking the country’s risk into consideration, he would certainly require a higher rate of return investing in Pakistan than in its peers. Intriguing isn’t it?
The concept boils down to one of the questions I keep asking myself regularly – What comes first: growth or development?
Developmental activities which change the dynamics of an economy for extended future, generally don’t create as much hype as opposed to short-run boom and bust periods. Coverage generally starts by the time growth rates factors in the fruition of such activities. However, the story is already dead by that time.
Let us look at some of the key elements which could lead to Pakistan’s entry into the investors’ radar, globally:
The CPEC Corridor: What does it mean for Pakistan?
The China-Pakistan Economic Corridor is a 3,218-kilometre long route consisting of highways, railways and pipelines. It is to be built over the next several years. It could turn South Asia’s economic dynamics on its head. China currently imports 80% of oil from the Strait of Malacca to Shanghai, which constitutes a distance of 16,000 kilometres.
The completion of this route will result in this distance getting reduced to less than 5000 kilometres, resulting in significant decrease in time and cost. This also means better access to China to the markets of Africa, United Arab Emirates and Europe. But apart from all this, it also gives a unique opportunity to Pakistan, geographically.
The economic corridor will pass through the Gilgit-Baltistan province in the north, connecting Kashgar in China’s western province Xinjiang to the rest of the world through the Chinese-operated Gwadar port. This would also include both infrastructure and energy development in Pakistan, which is an integral part of the agreement. Consequently, Pakistan would act as a cashier for everything going through the route – resulting in job creation, which trickles down to higher growth rate over time.
The determinants of an increase in output
There are two elementary variables for the increase in output: increase in labour force and labour productivity. Basic social services like access to quality healthcare, sanitation etc., are essential for the growth in productivity. A society which does not have access to quality healthcare does not have a healthy living and working atmosphere. In fact, it’s constantly threatened by diseases, and the productivity of working population is considerably dampened.
This is why socialism is an essential part of the growth of capitalism. In the absence of certain checks and balances, providing these basic facilities does not guarantee an increase in growth. However, sustained growth levels also cannot occur without these social services.
The South Asian reputation: how is Pakistan moving forward?
South Asia has had a bad reputation of being ignorant in providing basic social services, with an exception of Maldives and Sri Lanka. On an average, only 44.7% of the population in South Asia has access to improved sanitation facilities. Surprisingly, Pakistan stands well above this metric at 63.5% by the end of 2015, having grown from 36.9% in 2000. A little below the global average of 67.2% but, is impressive from South Asia’s standpoint.
A number of doctors per 1000 population in a country are an important metric to look at in order to examine healthcare accessibility. The higher the number, the better it is (Since doctors being less scarce means more affordability).
As of 2011, there were 0.67 physicians per 1000 population on an average in the whole of South Asia. Pakistan ranked second, with 0.83 physicians per 1000 population. This number has gone up to 1.1 (as of November 2016), close to WHO guidelines of 1.6 doctors per 1000 population. Also, the out-of-pocket percentage of the expenditure on healthcare by the private sector is 86.8% as of 2014. Thereby, showcasing a trend of sharp decline from 97.7% in 1995, implying a leap towards affordability.
Pakistan has a fairly young population with a median age of 23 years, well below the Asian average of 30 years. Hence, more people that are currently not contributing to the working population would be joining the workforce in the coming years. This implies an increase in the labour force – one of the two important variables for the growth in output.
Low inflation and a cheap currency
Pakistan, like the rest of South Asia, benefits from the fall in commodity prices which helps in keeping the inflation in check. The inflation rate in Pakistan has fallen from over 13% in 2010 to less than 3% by the end of 2015, close to the regions’ average of 3.5%. This has also led to a fall in the current account deficit from 9.2% (2008) to a comfortable level of less than 1%.
Amid manufacturers’ focus on cheaper labour away from China, countries like Pakistan and Bangladesh offer attractive destinations because of their cheap currencies. Bangladesh has taken a big leap in the clothing sector. It is now the second-largest exporter of garments in the world.
Pakistani Rupee, compared to the US Dollar, has depreciated from 90PKR/ Dollar to close to 105PKR /Dollar currently. This undoubtedly hurts importing goods and commodities. Yet, during a time of falling commodity prices, the pros that a cheap currency offers from increasing foreign investments outweigh the cons.
Low visibility: Does it help?
Pakistan’s political instability and terrorist events have kept it out of the economic picture for quite long. Since it does not leave much room for disappointment, the lack of attention became an advantage.
In the emerging world, laggards -who remain away from economic scrutiny and hype, are most likely the ones to outperform the next. The reason behind this is that there is a fair chance that the country would offer cheap investment opportunities with very little downside.
Impediments in the process of growth
Without a doubt, there are some major risks. Uncertainties over domestic security and its relations with India (which are at a low point currently) makes investors sceptical. The country also needs to consider increasing its total healthcare expenditure, which is quite low at 2.6% (close to Bangladesh).
Also, the focus on education needs to increase in order to notice an improvement in the literacy rates. It may be easier for Pakistan to see a surge in its current income level, without improvement on these aspects. But, it would be difficult to face the next big step since the competition would become fiercer.
Manufacturing and investment have also remained low at 13%. This, however, changes if the $46 billion CPEC Corridor is executed successfully. It would provide the infrastructure and energy facilities for foreign players to consider setting up plants in the country. In fact, some automobile manufacturers are already doing this.
India’s and the United States’ stance on the Economic Corridor is yet to be seen. President Elect Donald Trump’s blunt anti-China stand could be a point of concern since the corridor aims at benefiting China more than anybody else. While there is no certainty when it comes to forecasting, the probability of Pakistan’s growth looks reasonable in the decades to come.
Harris Parvaze is an associate at Moody’s Analytics. Prior to this, he has worked for a hedge fund as well as KPMG.
*Most of the Data is taken from The World Bank, Number of Doctors in Pakistan is taken from the govt. A website which was then extrapolated per 1000 population and Metrics for the CPEC Corridor and the Map are taken from a report by Deloitte.
Featured Image Source- Bayern