The Pakistan Stock Exchange (PSX) faced the impact of a series of major negative economic developments that occurred on Thursday, as the benchmark KSE-100 Index registered a drop of over 750 points during intra-day trading on Friday.

At the time of this report, the KSE-100 Index was hovering around 41,482.16, a fall of 755.75 points or 1.79%. On Thursday, the benchmark index had extended losses and closed 518.13 points or 1.21% lower to settle at 42,237.91 points.

Selling pressure at the PSX comes as Moody’s Investors Service announced that it has downgraded Pakistan’s outlook to negative from stable. It affirmed Government of Pakistan’s B3 local and foreign currency issuer and senior unsecured debt ratings.

Shortly after Moody’s announcement, the federal government said it is increasing petroleum prices by another Rs30 per litre, taking it to its highest level, to meet an International Monetary Fund (IMF) condition for the revival of the Extended Fund Facility (EFF) programme.

Finance Minister Miftah Ismail, while announcing the price hike, said that the increase was necessary for the IMF programme and other subsidies would also be withdrawn in the budget to be announced on June 10, 2022.

He also announced that the federal government has decided to end the tax amnesty scheme announced by former Pakistan Tehreek-e-Insaf (PTI) government. The scheme would not be extended.

Meanwhile, Moody’s cited Pakistan’s heightened external vulnerability risk and uncertainty around the sovereign’s ability to secure additional external financing.

“A lot of developments on the economic front have led to this reaction in the market,” Sana Tawfik, vice-president of research and a senior analyst at Arif Habib Limited (AHL), told Business Recorder.

She said that the petroleum price hike, Moody’s downgrade of Pakistan’s outlook and the decline in foreign exchange reserves were all negative developments.

“Inflation is projected to jump up to at least 16% or, in case of a further hike in POL rates, to 18%,” said Tawfik.

She added that the markets would remain under pressure in the upcoming budget week, where the government is expected to announce further removal of subsidies.

“However, the pressure may subside, if the Chinese loan rollover deal is materialised,” she added.

AHL in its latest report said that Moody’s decision of downgrading the outlook to negative would have a “spillover effects on local/foreign currency bond yields by a way that it influences country’s degree risks”.

“This will cause impediments for much needed Foreign Direct Investment (FDI), which recorded an inflow of $1.5 billion (-2% YoY) in 10MFY22. That said, the news of downgrade might not bode well for Foreign Portfolio Investment (FPI),” it said.

This is an intra-day update.

The story was originally published in Business Recorder on June 06, 2022.