Pakistan economy still hampered by image problem

Source: Published in Business & Economy on Tuesday, June 21, 2016

KARACHI: Pakistani stocks are soaring, improved security is fuelling economic growth and the South Asian nation will be upgraded to “emerging market” status by index provider MSCI.

KARACHI: Pakistani stocks are soaring, improved security is fuelling economic growth and the South Asian nation will be upgraded to “emerging market” status by index provider MSCI.

But for Ali Saigol, co-founder of a private equity firm, convincing foreign investors to overlook the country’s violent past and bet on its economy remains a hard sell. He said pitches often encountered the same problem: Pakistan’s image.

After a turbulent decade of gun and bomb attacks on cities, some investors still refuse to visit Pakistan and insist on meeting Mr Saigol in Dubai.

“Most people have never been to Pakistan. It’s a huge problem,” he said, sipping a cappuccino in an upscale cafe in Islamabad, Pakistan’s leafy, affluent capital. “When people visit Pakistan, they see it’s actually opposite of what they expect.”

Mr Saigol’s frustration goes to the heart of Pakistan’s struggle to attract foreign investment and boost economic growth from 4.7 per cent towards above 6pc, the minimum level experts say is needed to absorb new entrants into the job market in a nation of 190 million people.

Pakistan’s $250 billion economy is growing at the fastest pace in eight years but only attracted $1bn in foreign direct investment (FDI) in the nine months to April. FDI inflows into Indonesia, by comparison, hit $29bn last year.

In major cities, car sales are rising and shopping malls are sprouting to cater for an expanding middle class.

A crime crackdown in Karachi has helped spur a real estate boom and new, upmarket seaside restaurants and cafes are overflowing.

PERCEPTIONS TAKE TIME TO CHANGE: The progress is in stark contrast to economic instability during the past decade, when the stock market collapsed and Pakistani Taliban militants held territory 100km from Islamabad.

The militants have since been contained in small pockets in mountainous areas near the Afghan border and the country’s stock market is Asia’s best performing index in 2016.

“Perceptions change with a lag. Our reality has changed, but it takes a little while for investors to realise that,” said Miftah Ismail, an adviser to the prime minister tasked with bringing foreign investment into Pakistan.

Mr Ismail said he had expected more money to flow from abroad by now, and concedes investors need convincing that Pakistan “will not revert to type” by running large deficits and facing foreign exchange crises.

There are tentative signs foreign companies are eyeing Pakistan’s fast-growing consumer market.

Carmakers Renault-Nissan are considering a plant in Pakistan, and Suzuki, which already has a presence, said it may invest $460m for a new factory. A Dutch dairy cooperative, FrieslandCampina International Holding, in March announced plans to buy a stake in Pakistani food giant Engro Foods, in a deal estimated at $460m.

INDICATORS ‘FLASHING GREEN’ Omar Hamid, head of Asia Pacific country risk research for IHS, said interest in Pakistan has soared this year by IHS corporate clients seeking country and political risk analysis. “It’s a massive consumer market and the economic indicators are flashing green for many international companies,” he said.

Pakistan’s interest rates are at 42-year lows, inflation has been tamed at about 3pc, the currency is stable and foreign exchange reserves have jumped to all-time highs. The economy is also expected to receive a shot in the arm from the $46bn China-Pakistan Economic Corridor (CPEC).

Much of the money is earmarked for power stations to ease chronic electricity shortages which hobble business and investment.

In Karachi, the business community hopes MSCI’s upgrade of Pakistan will herald a return of foreign investors who fled in anger in 2008 when the bourse imposed a floor and trapped them in a collapsing market for three months.

“What happen in 2008 could never happen again,” said Haroon Askari, deputy director of the Pakistan Stock Exchange. Pakistan’s main benchmark index has risen more than 500pc since the start of 2009, but is still considered cheap by some, trading at multiples below other emerging markets due to political and security risks associated with Pakistan.

Saigol, founding partner of Baltoro Capital, which manages a new $48.5m private equity fund, said foreign investors who finally take a serious look at Pakistan are often surprised.

“They say they have never seen a country or an economy the size of Pakistan with so little coverage, so under the radar.”