Political risk consultancy firm ‘Eurasia Group’ (EG) assigned a negative outlook to India and Pakistan for both short-term and long-term investment in 2020, but conditions might be a lot worse for the rest of South Asia.
EG’s lead South Asia analyst Akhil Bery revealed this at a webinar organized by the South Asian Society of Economic Reporters (SASER)’s on Thursday.
In a detailed discussion on the challenges and opportunities faced by the South Asian countries and how do the western investors see countries like India, Pakistan, Bangladesh, and Sri Lanka as potential investment grounds, Bery said that while India managed to keep investors’ confidence high during the first term of Prime Minister Narendra Modi, much of that confidence has evaporated since the beginning of his second term.
Prior to the elections in India, western investors were anticipating Modi’s second term to continue and expand on the economic reforms.
PM Modi has built a reputation as a pro-business and pro-reform politician, and has gone out of his way to engage corporate and CEOs, and has openly met and courted them. The first term helped shaped this idea, especially the bankruptcy reform and the goods and services tax.
However, market realities did not match the expectations and the Indian government now seems to be a lot more focused on socio-political issues.
This is an inherent risk here for investment, especially considering the differences between what the investors were expecting and what the market realities were. Modi’s blueprint for the second term has been the manifesto of BJP (we have abrogation of the Article 370 and Citizenship Act to prove that). Investors did not pay attention to it initially at their own peril. And Modi’s indifference towards the economy has been despite the fact that unemployment was at a 43-year high and GDP growth at a 6-year low. All this and the exacerbation of sectarian tension led us to list India under Modi as one of the top 10 geopolitical risks for 2020.
“Border war with China is another risk, although it is not a war scenario yet, what if it escalates? Potential blacklisting of Huawei might make sense geopolitically, but from investors’ point of view it just comes off as fluctuating rules,” Bery added.
Speaking about Pakistan’s investment and risks, Bery said that while Pakistan has traditionally always been seen through the lens of its foreign policy, the influence of China, and the situation in India, now things are changing due to Pakistan’s success in combating the Coronavirus pandemic.
“The question really becomes what is the outlook of an IMF program in Pakistan. The single most important issue is that when will Prime Minister Imran Khan agree to another program with the IMF and when will that program be completed? That is important because IMF asks for economic and structural reforms, in exchange for the bailout money,” Bery explained.
However, according to EG’s analysis, the program with the IMF was already starting to go off the rails a little bit before the coronavirus and the second installment was delayed a bit due to Pakistan’s challenges in raising revenue. “Going through five chairmen for the FBR in such a short period of time does not pull a lot of confidence from investors,” he said.
On the other hand, Pakistan is a success story on the coronavirus front, and this is one of the biggest opportunities for Pakistan, because it led Pakistan to qualify for the G-20 debt suspension initiative, saving about USD 1.8 billion in deferred payments. “And this will give Pak a chance to build foreign reserves. So investors are a little less concerned about Pakistan as compared to India,” he said.
Bery said, “Khan also seems to be on a stronger foothold as compared to pre-coronavirus times, due to his initial reluctance to impose a lockdown and then military stepping in to enforce a lockdown for him. Investors have come to accept the risks of military involvement in Pakistan’s politics and they do recognize the cozy relationship between IK and the military.
But the primary challenge for investors is that it is hard to compete against Chinese investment,” said Eurasia Groups South Asian expert. The Pakistani government has not done a good job of advertising the China-Pakistan FTA or in communicating with businesses on how they can take advantage of it.
At the same time, “even if the government could provide subsidies to incoming investors and local businesses on a cost ratio, they still cannot compete with the Chinese goods on a price level and FTA only exacerbates it,” he said.
“Another factor is FATF, and this is Pakistan’s last chance to get off the FATF grey list. On Wednesday, the last piece of legislation was passed, and the Asia Pacific Group on money laundering is meeting this week and a positive should come out of it, and also when FATF meets in October. But the continued presence of Pak on that list still causes damage to investors’ confidence. It prevents companies like PayPal to move to Pakistan due to potential money laundering and financial sanctions,” Bery said.