Pakistan's Post-Musharraf Rally Will Falter, Credit Suisse Says

By Kyung Bok Cho

Aug. 19 (Bloomberg) -- Pakistan's stocks rally after the resignation of President Pervez Musharraf will be short-lived because of a rising fiscal deficit and runaway inflation, Credit Suisse Group said.

The Karachi Stock Exchange 100 Index may gain as much as 15 percent in a ``relief rally,'' Credit Suisse's Karachi-based analyst Farid Khan wrote in a report dated today. ``But the euphoria will be short-lived as the economic reality dawns.''

Khan advised investors to ``take advantage of the current rally'' by reducing holdings in banks, consumer, auto and cement stocks. The benchmark index yesterday climbed 4.5 percent to 10,719.62, the biggest advance in eight weeks, paring the loss this year to 22 percent. Pak Suzuki Motor Co., the nation's biggest carmaker, has led declines in 2008, plunging 71 percent.

Musharraf resigned yesterday, ending a six-month standoff that had distracted the government from reviving an economy growing at the slowest pace since 2003. The biggest challenge facing the economy is a reduction in foreign-exchange reserves to about half the peak level last year, triggering a decline in the currency, Khan said in the report.

``Musharraf's resignation will bring down the political temperature, but the focus will now shift to the economy, which is showing serious signs of strain,'' Khan wrote. ``The monetary and fiscal policies will have to remain tight for some time and we reckon that interest rates and inflation have yet to peak.''

Pakistan's inflation is running at a 30-year high and half the population of 168 million is short of food.

Musharraf had been under pressure to quit since he fired 60 judges, including Supreme Court Chief Justice Iftikhar Muhammed Chaudhry last year, leading to nationwide street protests.

Investors stoned the stock exchange last month after a slump wiped out $30 billion of market value in three months, prompting the regulator to attempt to support the market. The Securities and Exchange Commission of Pakistan imposed a 1 percent daily limit on price declines and then removed the cap after stock trading volumes fell to their lowest in a decade.

To contact the reporter for this story: Kyung Bok Cho in Seoul at kcho7@bloomberg.net