- Stable PKR, reform-driven growth, and a promising equity market outlook
According to Intermarket Securities, December gains round off a stellar year 2024. The KSE-100 had its best December in the last two decades, rising 14% to bring 2024 gains to 84% in PKR (+86% in US$). Trading activity also remained brisk, with daily turnover averaging US$137 million across the month. Equities were boosted by continued monetary easing, with the State Bank of Pakistan (SBP) reducing the Policy Rate by 200bps to 13%. The resultant valuation expansion, led by aggressive buying by local mutual funds, enabled the market to ignore noisy politics and resurgent security concerns.
The brokerage house continues to remain positive on Pakistan equities, with the tail-end of monetary easing expected to revert valuations to the long-term mean (7.5x P/E) in 1H 2025. Successful reform implementation can unlock stronger rerating and more upside across the year.
Watch politics and reforms
Aided by timely entry into the 3-year IMF EFF programme, Pakistan successfully stabilized the economy in 2024. This has reflected most prominently in CPI dropping from 30% at the start of the year to below 5% in the latest reading, enabling the SBP to cut the Policy Rate from a record-high 22% to 13%. Positives include a stable PKR, backed by a string of monthly current account surpluses and foreign exchange reserves rising to more than 2.5-month import cover.
Foreign Exchange Reserves
The total liquid foreign exchange reserves held by Pakistan were reported at US$16,408.7 million as of December 27, 2024. The break-up of the foreign reserves position is as under: reserves held by the State Bank of Pakistan amounted US$11,710.5 million, while net reserves held by commercial banks were reported at US$4,698.2 million. During the week under review, reserves held by SBP decreased by US$143 million to US$11,710.5 million due to external debt repayments.
The mantra for 2025 is “sustainable growth” with authorities keen to avoid the short boom-and-bust cycles that have defined Pakistan’s economy ever since the global financial crisis of 2008-09. This is manifesting in both politics, with little tolerance for dissent, as well as in a serious reform effort especially on taxation. December 2024 saw higher corporate income tax rate for banks as well as the finalization of amendments to the income tax ordinance.
Salient features of the latter included severe restrictions for non-tax filers in terms of bank withdrawals, purchase of property/ vehicles, and investing in the stock market. In addition, the overarching desire to achieve policy continuity and economic stability over a longer cycle has led to the launch of the “Udaan Pakistan” project — termed a homegrown national economic plan 2024-29. Details of this plan are still awaited.
Politics to be noisy but not disruptive
Imran Khan remains incarcerated and the PTI continues to have its back to the wall, having belatedly entered into formal talks with the government. Supportive statements for Khan have come in from an incoming aide in President-elect Trump’s second administration, and pressure has also arisen from fresh US sanctions against certain Pakistani companies supplying its ballistic missiles program. Even so, political disruption at this stage appears unlikely, with both the deep state and the government strongly incentivized to shut out the PTI and preserve status quo. PTI’s failed march onto Islamabad in late November last year suggests a mass movement à la Bangladesh is also highly unlikely.
In similar vein, security concerns may remain elevated in 2025 but not to the extent of risking economic derailment. Pakistan has recently become more assertive in going after proscribed terrorist organizations such as the TTP, including conducting air strikes into neighboring Afghanistan. There may be blowback from this going forward, but with limited impact on the broader economy going by precedence.
Bull-run to continue in 2025
The brokerage house expects the PKR to continue being stable, and for the Policy Rate to come down to 11% by June before stabilizing (the 10-year Policy Rate average is 10.75%). The tail-end of the monetary easing cycle should revert equity market valuations to the long-term mean, taking the KSE100 to 130,000pts. More upside is possible (bull-case Index target is 160,000 points), but is highly dependent on Pakistan delivering on the tough reforms it has embarked on, in diverse areas such as taxation, energy, and privatization.