In an utmost surprise Donald Trump has been elected President of
the only surviving super power, United States (US). Not only residents of many other
countries find it a bitter pill to swallow, demonstrations are also being
staged in the US, one of the rare happenings in the country enjoying democratic
rule of more than two centuries.
I have posted a blog some time back exploring the possible impact of
2016 elections. My bottom line was that the love/hate relationship will be
driven by the foreign policy agenda of the super power. Over the last 48 hours
I have been going through the global news networks as well as Pakistan to have
a better understanding of the likely outcome of shift in foreign policy agenda.
This brief is based on the writing of one of Pakistan’s leading brokerage
house, AKD Securities.
The brokerage house believes that the US foreign policy under Trump
may remain highly volatile, there is also a possibility of an overhaul in
US-Pak relations. The republican's campaign rhetoric leads force Pakistanis to
believe that micromanagement and unilateral actions along Pakistan's borders may
ease out under Trump Rule. In this backdrop, Pakistan has done well by
diversifying its foreign relations towards Russia and China's ongoing ambitions
in investing heavily into Pakistan.
In line with global markets, near term volatility at the Pakistan
Stock Exchange (PSX) cannot be ruled out. However, Pakistan market's
correlation with regional markets has decoupled on the former's possible
inclusion in the MSCI EM Index and momentum for infrastructure and economic
development together driving 21%CYTD returns for the benchmark index which can
be expected to continue in the medium to long term.
Pakistan has suffered the most during the incumbent government of
PML-N due to the absence of full-time foreign ministers. Worst of all the two foreign
policy advisors are not on the same page. Admitting that these are unchartered
waters and while analysts believe that the US foreign policy under a Trump may remain
volatile, there is also a possibility of an overhaul in the bilateral
relationship as Pakistan has largely remained at the periphery of US interests
in this region.
The republican's campaign rhetoric compels Pakistanis to believe
that micromanagement and unilateral actions along Pakistan's borders may ease
out under Trump. The onus would be on Pakistan to keep its western borders safe
as the US pulls out of Afghanistan. As far as the current hostile situation
between India and Pakistan is concerned, the US as always will likely encourage
both countries to come to the negotiation table. In this backdrop, Pakistan has
done well by diversifying its foreign relations towards Russia and China's
ongoing ambitions in investing heavily into Pakistan.
Historically, aid flows from the US have fluctuated due to ever changing
US geo-political objectives in the region. After nearly a decade of withholding
assistance, inflows recommenced in 2002 and scaled up considerably in lieu of
Pakistan's alliance with US on counterterrorism efforts post-9/11.
The aid appropriations have accumulated to US$19.07 billion under
economic (US$11.1 billion) and military (US$7.9 billion) assistance.
Additionally, Pakistan received reimbursements under CSF, forming the largest
chunk of inflows with US$14 billion received since 2002. However, actual
disbursements - particularly economic aid - have reportedly remained much
lower, where EAD data reflects economic grants disbursed to Pakistan since FY07
at US$2.1 billion.
As per a USAID report, disbursements under the Kerry-Lugar-Berman
Act (promising US$1.5 billion annual economic support over FY10-14) as of September'15
add up to US$1.8 billion. Following developments in 2011, aid from US has
tapered off where economic/security related aid appropriation to the country
declined to US$423 million/ US$320 million in FY17. Post-elections, economic
assistance is likely to stagnate at current levels while military aid can be
considerably scaled back with CSF flows remaining absent (US$300 million yet to
be paid) if recent disagreements on action against the Haqani network continue
along with withdrawal of troops from Afghanistan.
In this backdrop, Pakistan's macroeconomic focus has been shifting
towards the East as the country embraces Chinese investments and positions
itself as a beneficiary of foreign direct investment under China Pakistan
Economic Corridor (CPEC) from the world's second largest economy.
While US remains one of major destinations for Pakistani exports,
the quantum has in fact declined remained to16% in FY16 as compared to 19% in
FY09. To recall, Pakistan's recent request for preferential access for textile
exports to US was rejected. US is likely to revisit its trade and investment
ties under the new leadership, however any trade facilitation to Pakistan remains
unlikely going forward.
Similarly, outlook on investment from the US remains bleak (FDI
share from the US down to 2% from 23% during FY09-16), where any recovery in
the same will largely remain a function of Pakistan's intrinsic business
climate. Longer term risks remain in the form of stricter immigration rules
that can affect remittance flows from the US that make up 13% of total inflows
(already declining due to anti-money laundering laws in US).
Trump's victory can fuel expectations for rate hikes
quicker-than-projected currently in the backdrop of Trump's criticism earlier
of Fed's policy to hold-off rate increase this year. This entails direct
implications for foreign flows to regional markets including Pakistan as was
the case in CY15. In this regard, upcoming FOMC meeting in December'16 will be
crucial to track changes in the Fed's outlook. On the other hand, greater
volatility in global financial markets due to an uncertain US policy outlook
can propel the Fed to delay a hike to next year.
In line with global markets, near term volatility at the PSX also
cannot be ruled out. However, Pakistan market's correlation with regional
markets has decoupled on the former's possible inclusion in the MSCI EM Index
and momentum for infrastructure and economic development together driving 28%CYTD
returns for the benchmark index.
