Pakistan’s equity market surges 55% in 2023 despite national currency’s 20% decline

31 December 2023

Published in: Arab News

As 2023 draws to a close, Pakistan’s equity market has seen a remarkable 55 percent surge, its most significant in 13 years, despite the national currency depreciating 20 percent against the greenback, marking a year of dynamic and impactful financial transformations.
In the first half of the outgoing year, Pakistani capital markets faced substantial challenges, with ongoing economic issues and political uncertainty fueling rumors of an imminent default on the country’s international obligations.
However, a pivotal shift took place in the middle of 2023 when the coalition administration of former prime minister Shehbaz Sharif managed to secure a $3 billion standby arrangement (SBA) from the International Monetary Fund (IMF), providing a much-needed financial lifeline to the country.
The signing of the SBA brought significant jubilation to the equity market, heralding newfound optimism and stability after a period of prolonged uncertainty and turmoil. The benchmark KSE100 Index surged by 55 percent that implied a 24 percent increase in dollar terms.
According to Topline Securities, such massive gain was witnessed after a period of 13 years, following the 60 percent increase in the index in 2009.
“Pakistani stock market went up by more than 50 percent last year and it was up 65 to 70 percent from the second half of last year,” Ali Farid Khwaja, Chairman of KTrade Securities, told Arab News. “So, it was one of the best performing asset classes in Pakistan and one of the best performing markets among the emerging markets globally.”
Khwaja noted multiple drivers for the surge, with the IMF program and the subsequent increase in investor confidence being the most significant.
“In the first half of the year, people were worried that Pakistan could default,” he added.
The key stock index, KSE100, closed its year-end trading session at 62,451 points after hitting the all-time high of 66,426 from 40,420 recorded during the last trading session of 2022.
The bulls also found a plausible reason to further tighten their grip at the equity market after the caretaker government managed to secure financial support from friendly nations like Saudi Arabia and the United Arab Emirates (UAE).
Ahsan Mehanti, CEO of Arif Habib Corporation, also described the establishment of the Special Investment Facilitation Council (SIFC), a hybrid civil-military forum to fast-track decision making and encourage foreign currency inflow, as a positive development for the market.
He noted that it received “commitments of up to $100 billion from the Saudi government, UAE, Kuwait and Qatar.”
Mehanti maintained the Gulf countries’ financial assurances also convinced the IMF to release the funding under the SBA.
He noted that foreign corporates resorted to net buying of $73 million in 2023 after three years, recording highest inflows after a gap of eight years.
Pakistani financial analysts said they were optimistic about the stock market in 2024 due to cheap valuations, availability of liquidity, lack of investment avenues and expected interest rate fall from the historic high of 22 percent.
Unlike the equity market, the Pakistani currency market experienced one of the worst periods of depreciation, closing the year-end trade at Rs281.86 against the US dollar on Friday after the national currency lost about 20 percent value in the interbank market.
The rally in greenback after August 14, when the caretaker government took charge and the rupee came under further pressure amid speculation that the interim setup might allow the rupee to fall amid a tough situation in the open and black markets.
“Amid talks of default and turmoil there were three markets with different rates operating,” Zafar Sultan Paracha, general secretary of the Exchange Companies Association of Pakistan (ECAP), said, adding: “One was the grey market which had touched Rs350. The open market rate stood at Rs335, and the rupee had depreciated to 307 against the dollar in the interbank market. It was a very alarming situation at that time.”
Paracha gave credit to the army chief, General Asim Munir, for taking necessary steps that brought stability to the market.
“Due to the administrative measures taken by the army chief and his team, the smuggling of dollar to the neighboring country [Afghanistan], money laundering, flight of capital, hoarding and speculation stopped,” he said. “It was after a long time the same rate in interbank and open markets prevailed.”
The government also cracked down on exchange companies involved in illegal trade and increased the minimum capital requirement for them from Rs200 million to Rs500 million.
As a result, the rupee gained strength in the interbank market, appreciating by nine percent from an all-time low of Rs307 to Rs282 against the greenback while strengthening it in the open market by 16 percent.
However, Pakistani financial experts said the national currency was likely to lose ground against the dollar in the foreseeable future due to external payment pressures.
“Considering Pakistan’s external payment risk and other factors, we expect the rupee in the interbank market to reach Rs310 against the US dollar by June 2024 and Rs325 by December 2024,” Muhammad Sohail, CEO of Topline Securities, said.