Real impact of Nawaz disqualification


I was following news on the disqualification of former Prime Minister Nawaz Sharif by the Supreme Court on account of the (in-)famous Panama Case. I was checking the reactions on social media. Most of the reaction seemed to only focus on politics. For a lot of people in the online Pakistani community, the concern was primarily corruption charges and they cheered decision of the SC.
While news & social media was busy, the markets started showing jitters. The KSE-100 tanked 3.6% in early trading after the verdict, but as initial news of Shehbaz Sharif taking over the helm from his brother percolated, the markets bounced back to their previous levels. KSE-100 had already seen a lot of volatility this year, partly due to the listing of Pakistani Stocks in MSCI Emerging Markets Index.
What no one was talking about in the media was about the long-term economic impact of political instability. To say that the international credit rating agencies, IMF & MSCI are not watching this event closely is being too naïve. Despite Pakistani stocks not getting the weightage that they wanted in MSCI-EM Index (0.10% rather than the expected 0.19%), political stability, a clean handover of the democratic reign from the PPP to PML-N and the ambitious plans/reforms promised by this government, was the primary factor that drove the inclusion. It was also the reason for IMF to be cautiously ‘optimistic’ about the country. Pakistan needs ‘at least’ 4-5% of consistent GDP growth for the next 2 decades to tide over any possibility of a mega-default.
I don’t have much opinion of political parties, ideologies or political struggle within Pakistan. But, if the possible future PM Mr. Shehbaz Sharif or the current PM Shahid Khaqan Abbasi, face similar scrutiny due to the Panama Case or any other case and are weakened or worse removed before his term ends; there will be backlash from international investors. Political tussle There is a real possibility that rating agencies might downgrade Pakistani Government Bonds negatively impacting the ability of the State to raise funds to bridge fiscal deficits (Moody’s have already raised concerns). Too much debt is a toxic mix with political instability, which will put pressure of Pakistani currency leading to more depreciation. MSCI-EM might also reduce their exposure to Pakistani stocks in their kitty (especially Bank stocks).