Moody's upgrades outlook to stable
§ Moody's Investors Service has revised Pakistan's Sovereign rating outlook (foreign and local currency bond) from 'Negative' to 'Stable', while keeping the rating (B3) intact. According to the communiqué released by Moody's, augmentation of Pakistan's IMF program by USD3.2bn, reduction of subsidies, better targeting of social welfare programs and ongoing policy and structural reforms were the main factors behind current revision in sovereign outlook.
§ Pakistan's economy has been showing considerable signs of recovery. Headline inflation has declined to 11.2%YoY in July 2009 from its peak of 25.3%YoY in August 2008. Core inflation has also dropped to 14.0% in July-09 from its peak of 18.9% in Feb-09. Current Account Deficit has come down to 5.3% of GDP in FY09 compared to 8.5% in FY08 while fiscal deficit has slipped from 7.6% of GDP to 4.3% during the same period. Furthermore, compared to FY09, exchange rate has become relatively stable while Pakistan's Forex reserves have increased to USD11.8bn from USD9.9bn in December 2008 . All of these factors had already been pointing towards a favorable review from international credit rating agencies.
§ The CDS spread on Pakistan's sovereign bond has already slipped to ~1650bps from its peak of 5,000bps in October 2008, depicting a considerable reduction in country's risk. Following Moody's review, we expect CDS spread to drop and PKR/USD exchange rate to stabilize further. We believe that the revision in outlook from 'Negative' to 'Stable' may also pave way for an upgrade in ratings in the future .we also expect Standard and Poors' to follow suit with a revision in outlook on Pakistan's sovereign bonds.
§ Compared to a net outflow of USD442mn from the local bourse during FY09, re-emergence of foreign investor confidence is visible with a USD49mn net inflow since July'09.
§ Given the huge discount at which KSE-100 is trading relative to its regional peers, we expect the re-rating of the local equity market to continue. The KSE-100 index is currently trading at a CY09 P/E 7.6x and offers a prospective dividend yield of 8.2%. Our top picks are HUBC, KAPCO, OGDC, POL FFC, MCB, PTC.
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