Pakistani business banks on political stability

KARACHI (Reuters) - President Pervez Musharraf's fate hangs in the balance, Pakistan's next government has yet to take shape and the economy faces myriad challenges, but Pakistani business can see the light: long-elusive political stability.

As the party of slain opposition leader Benazir Bhutto started to build a coalition on Wednesday after polling first in Monday's general election, earlier fears that a forced Musharraf exit could undermine political and economic stability faded.

Shares on the Karachi stock exchange hit a new life high on Wednesday as investors cheered the fact the poll passed off peacefully and without controversy.

Pakistani shares fell 4.7 percent in a single day following Bhutto's December killing, the bourse's biggest daily loss in 18 months, while the Pakistani rupee hit a six-year low.

"The uncertainty is gone," said Shaukat Tarin, financier and chairman of the Karachi Stock Exchange. "The investor community has heaved a sigh of relief that the people of Pakistan have spoken, the polls were fair and accepted by all parties."

Bhutto's Pakistan People's Party (PPP) has vowed to put before parliament the issue of the president's future, whose popularity has largely disintegrated over the past year, especially after he imposed a stint of emergency rule in November.

But first the PPP must secure power. The PPP and the party of former prime minister Nawaz Sharif dominated the election, while the Musharraf-backed Pakistan Muslim League was routed.

Analysts warn that ideological differences and past bad blood could scupper an alliance between the PPP and Sharif, in which case, the PPP's doors could re-open to Musharraf's friends.

And with annual inflation at its highest in over a decade, a hefty trade deficit, pressure from high international oil and food prices and domestic energy shortages weighing on the $160 billion economy, political stability is only half the battle.

"Short-term (challenges are) inflation, to make sure that the fiscal deficit ... is contained," Tarin added. "Medium-term is to work on the balance of payments, to see that the current account deficit is reduced so we do not have undue pressure on our foreign reserves."

"(And) to make sure the economy keeps growing at 6-8 percent, but with a little more of a trickle down than we have seen which means we attack the poverty side."

ECONOMIC HURDLES

Consumer prices in January rose 11.86 percent from a year earlier, their highest level in 10- years, which analysts put down to food shortages they say are due to a weaker agricultural crop and mismanagement by the previous government.

The central bank last month lowered its economic growth forecast for 2007/08 (July-June) to 6.6-7.0 percent, citing a weak farm sector that has been a main engine of growth that has averaged about 7.0 percent a year since 2002.

The stock market however is on the rise. After the initial shock from Bhutto's killing, the Karachi benchmark 100-share index is up more than 5.0 percent so far this year.

Pakistani stocks have proved attractive to local institutions though foreign investors were mostly on the sidelines ahead of the elections.

The Karachi stock market is the only share market in Asia to have gained this year -- its gains over the past 12 months ranked behind only China and Indonesia. Last year, the bourse rose 40 percent and has risen about 900 percent since 2000.

"The direction of the stock market after the initial rally of a peaceful election is going to be a function of who the economic managers are going to be and their commitment to the economic policies we have seen thus far," said Asad Iqbal, managing director at Ismail Iqbal Securities Ltd.

Iqbal sees the 100-share index ending the year at 16,200 points, or firming another 9 percent. Others see the index hitting 17,000-17,500 points.

Mohammed Sohail, director of equity broking and research at JS Global Capital, also sees the election outcome underpinning investor confidence.

"It will at least help in stopping the dollar outflows, resuming GDR (global depository receipt) sales, as well as bringing back the foreign investors who have been waiting on the sidelines," he said.

Foreign investment in the first six months of the fiscal year (July/June) fell 32 percent to $2.17 billion from a year earlier, with foreign portfolio investment down 92 percent, central bank data shows.

And will Musharraf's political fate will make any difference?

"I believe that the economy is on a sound footing and the corporate sector is doing pretty well. So, in my opinion, it won't make much of a difference if Musharraf is not there," Sohail said.

(With reporting by Sahar Ahmed; Editing by Valerie Lee)