Daily Times

KARACHI: Pakistan’s likely inclusion in the Financial Action Task Force’s (FATF) terror financing watch list may not, as is anticipated, dent country’s economy much, said analysts.

Potential inclusion on the FATF grey list is a clear negative for the economy, financial system and asset prices but its impact is never a knee-jerk reaction. It may result in additional due diligence by foreign financial institutions, which are involved in documentary credits (LC’s), cross-border payments via SWIFT, foreign inflows into PSX and bond issuances by Pakistani government, said Hamad Aslam, an analyst at Elixir Research Department.

Pakistan was last classified on FATF Grey List in February 2012 to February 2015. The country even managed to get an IMF bailout in 2013 and raised $3 billion from global debt markets in 2015.

The concerns observed during that period included exodus/curtailment of operations by foreign banks and rating downgrade by Moody’s.

It is important to mention here that Pakistan’s name did not appear anywhere on the press release issued at the conclusion of week-long session of the FATF. However media reports suggest that the “decision has been taken to add Pakistan to the FATF grey list in June-2018”. According to reports, Pakistan has to submit an action plan over the coming few months, which will decide the eventual fate, as well as the key milestones that the government will have to achieve in order to be successfully removed off the list.

“We however highlight that the addition to the watch list does not imply any economic or financial sanctions for the country; instead it serves as a “notice” to the country’s financial institutions and government to tighten the compliance with global Anti-Money Laundering (AML) regulations”, added Aslam.

Pakistan was last placed on the FATF grey list in February-2012, but was cleared off in February -2015, owing to improvement shown by the country in combating the twin menaces of money laundering and terrorist financing. Taking cue from history, the implications on the broader financial sector was negative as HSBC and Barclays both exited Pakistan during 2012-15 while Citibank significantly curtailed its operations and branches during the same time period. The increased compliance, due to the FATF Grey List, could have played a role in this exodus.

On the other hand, broader impact on macroeconomic indicators was not concerning. It was business as usual, if not better, for Foreign Investment (direct and portfolio flows), external borrowing, exports, Credit Default Swaps (CDS), Eurobond Yields and Pakistani Rupee, he added.

For stock market sentiments, the uncertainty surrounding Pakistan’s inclusion on the Grey List is worse than the actual inclusion. Had the final decision been announced, the market would have taken a knee-jerk reaction but would have quickly forgotten about the event within a week. However now that the final decision and announcement is expected to be in Jun-18, the issue has added another layer of uncertainty to the already entrenched risks of balance of payment crisis facing the country, added Aslam.

In the short term, most investors would draw parallels with 2012-15 when Pakistan was last on the FATF list. During that period, not only the economic indicators continued with their upward momentum, but even Pakistan equities recorded one of the best times in history. KSE100 grew by 2x, FPI flows were recorded at over $900 million and United Bank Limited (UBL) successfully concluded its secondary public offering. However we believe that the real impact will be visible post General Elections, when Pakistan approaches the IMF, and sentiments would be driven by news flow on unsustainable twin deficits and depleting reserves, said Aslam.

“If the current rate of depletion of official reserves continues then the inclusion of FATF list will only magnify the concerns for stock investors over the medium-long term”.

Published in Daily Times, February  27^th 2018.