Pakistan increased taxes and energy prices, and in January allowed its currency to weaken to meet the IMF's key demands. Image Credit: Reuters

Pakistan’s key stock gauge surged by the most in 15 years on Monday after the nation clinched an initial $3 billion loan deal from the International Monetary Fund, easing default fears.

The nation’s benchmark KSE-100 Index gained enough to trigger a one-hour halt early in the session after reopening in the wake of the three-day Eid holiday. It rose as much as 6.3 per cent, headed for its biggest gain since 2008.

The rebound comes after a draft agreement with the IMF last week that gave the country a lifeline from a potential debt default. Pakistan is going through its worst economic crisis on record with sky-high interest rates and inflation. It increased taxes and energy prices, and in January allowed its currency to weaken to meet the IMF’s key demands. The rupee has lost more than 20 per cent this year, among the worst performers in the world.

“This IMF arrangement provides some comfort to investors over Pakistan’s ability to overcome short term external repayments,” said Ruchir Desai, fund manager at Asia Frontier Capital Ltd. based in Hong Kong. The “market should do pretty well” in the next few weeks, he said.

Inexpensive valuations are helping the market as well. Concerns related to the slew of negative headlines recently ranging from political turmoil to the risk of a debt default and sinking rupee had sent investors fleeing, with the KSE-100 Index becoming the world’s cheapest equity benchmark.

“Overall, the valuations are dirt-cheap with significant room for rebound,” said Ali Raza, head of international equities trading at BMA Capital, in Karachi.

Meanwhile, Pakistan dollar bonds advanced, with the paper due in 2024 gaining over 20 cents in the past week. The 8.25 per cent 2024 bond is indicated 0.2 cents higher to trade at 72.5 cents on the dollar on Monday, a level last seen about a year ago in August. The gains come after dollar bonds notched their best-ever week.

Economic indicators are helping as well. Pakistan’s inflation eased in June for the first time in seven months as record borrowing costs dampened demand and lower commodity prices slowed price gains. Consumer prices rose 29.40 per cent in June from a year earlier, according to data released by the Pakistan Bureau of Statistics on Monday. That compares with a median estimate for a 30.8 per cent gain in a Bloomberg survey and a record 37.97 per cent increase in May.

Still, the picture isn’t entirely rosy. Pakistan faces some $23 billion of external debt obligations coming due in the fiscal year starting July - more than six times the nation’s foreign-exchange reserves. Reserves dropped to $3.5 billion, to cover less than a month of imports - and below the global standard benchmark of three months. That restricted its ability to fund imports including raw materials, and forcing many factories to suspend operations.

But the IMF bailout does change the game, to some market watchers. Barclays upgraded Pakistan debt to market weight on the development. Moody’s Investor Service expects the deal to open up support from bilateral and multilateral partners and help the nation with its high external debt repayments, analyst Grace Lim said in an emailed reply.

“This is the first-ever market halt on a positive rally,” BMA’s Raza said. “This is a huge day for Pakistan equities.”