Is Pakistan the Vietnam of South Asia a good place to invest?

According to Maryam Cockar, investors should buy now if Pakistan is sincere about reform

Political unrest, a strong military, and a dependence on outside assistance and bailouts are not typically characteristics of prosperous economies. But the stock market in Pakistan is booming. In comparison to the FTSE 100's 10% return over the last 12 months, the Karachi Stock Exchange's KSE-100 index has returned almost 90%, with a minor decline in May as tensions with India increased. Although it has decreased 4% year over year, the Pakistani rupee has been comparatively stable by historical standards.

After obtaining a fresh £7 billion loan from the International Monetary Fund (IMF) in September of last year, when it pledged comprehensive reforms, such as increasing the price of energy and gas and broadening the tax base, market sentiment toward Pakistan improved. "The risk of any kind of near-term balance of payments crisis or debt default has been significantly reduced," according to Capital Economics' Gareth Leather, regarding the IMF deal.

"And the economy has done pretty well since then, on the whole. Thus, exports are doing well and foreign exchange reserves have recovered. The economy is generally doing well. The rise in equity markets, in my opinion, indicates that people are becoming less concerned that the worst-case scenarios are unlikely.

On the basis of a radical shift in economic management and potential, however, the rally may also portend a long-term bull market. Thomas Hugger of Asia Frontier Capital thinks that because of its big population, low wages, and wealth of natural resources like copper and gold, Pakistan has the potential to become the "Vietnam of South Asia." "I think they have a great chance to become a mini-Vietnam, create a lot of jobs, and build a middle class if the current government is truly committed to reforming it.

Although it barely avoided a sovereign debt default in 2023 thanks to a short-term IMF agreement and funding from Saudi Arabia, the United Arab Emirates, and China, Pakistan is still on a difficult path to recovery. About £29 billion, or 22% of Pakistan's total external debt, is owed to China. Due to high food and fuel prices, some reforms, like loosening import restrictions and eliminating energy subsidies, have raised inflation, which in June reached 38%. Data from the government shows that inflation decreased to 28.3% in July and 27.4% in August.

An economic roller coaster for Pakistan.

Poor income-tax collection, anemic growth, boom-bust cycles, and a sizable informal economy are all part of Pakistan's troubled past. "Debt accumulation has been overwhelmingly used to continue fostering a consumption-focused, import-addicted economy without investment in productive sectors or industry," write Ammar Habib Khan and Zeeshan Salahuddin in a report for the Pakistani think tank Tabadlab. Imported consumption is still rising while exports and remittances are stagnating, which shortens the boom cycle and increases the risk of another bust and inflation. The cycle continues indefinitely.

In addition, the military has significant influence over politics and the economy. Any leader who violates military regulations does not hold their position for very long. Imran Khan, the former prime minister, has been behind bars since August 2023 on what he claims are false accusations of corruption. According to Hugger, "The army is the wild card." "They have their own interests, which is abnormal and occasionally out of line with the state of the economy.

The problem is that these army generals cost the state a lot of money, and they want to keep living their wonderful lives.

According to Leather, the army is to blame for Pakistan's military takeovers and political unpredictability, which have negatively impacted the "broader business environment and sentiment that foreigners have towards the country." The economy's poor performance over the last few decades can be attributed in part to that. The US and China may find nuclear-armed Pakistan too strategically significant to fail, which would discourage the government from reforming.

Pakistan's ties with both have improved lately. With the Trump administration, Islamabad negotiated an agreement to develop oil reserves and a tariff of 19 percent on US goods, which is less than India's 25 percent (and now 50 percent) tariff. As of 2024, Pakistan's largest export is textiles, with over £5 billion in exports and about £2.11 billion in imports, with the US being its largest export market.

However, in contrast to other "dynamic" Asian economies, Pakistan is not an "especially trade-dependent open economy," according to Leather. "Tariffs are not as catastrophic as they would be in a place like Vietnam, for example. Having said that, they won't help if exporting to the largest economy in the world becomes more difficult.

Meanwhile, officials recently discussed the second phase of the China-Pakistan Economic Corridor, which is a component of the Belt and Road Initiative, and strengthening ties with China.

What comes next? There are still questions about Pakistan's ability to adhere to the IMF reforms. "In the past, Pakistan has made a lot of promises, reached an agreement with the IMF, and prevented the worst-case default; however, a few years later, when the economy has recovered from its worst setback, they have broken these agreements. They return to their old ways, and since things appear to be going well in Pakistan right now, I believe that's the danger. However, it is usually at that point that they begin to break their commitments," Leather says. It concerns their ability to remain in the IMF program for its duration.

Hugger, however, has more hope. "You can trade based on a few-week or month-long outlook, but if you want to make a lot of money, you must be a long-term investor and do it correctly."