• In its Feb’20 review, the Financial Action Task Force (FATF) has retained Pakistan on ‘grey list’ – formally known as ‘Jurisdictions under increased monitoring’, while extending the deadline to deliver on the action plan by another four months (next review is in Jun’20).
• The decision was broadly in line with market expectations. The official stance was mixed, carrying both carrots and sticks. The tone was relatively soft compared to the last one, with the statement acknowledging the ‘notable improvements’ and no mention of ‘serious concerns’.
• The probability of Pakistan dropping to the ‘blacklist’ officially referred to as ‘High-Risk Jurisdictions subject to a Call for Action’ is very low, considering the notable efforts it is making towards addressing the deficiencies and supportive geopolitical backdrop (i.e. steadfast diplomatic support from friendly countries and improved Pak-US relations).
• On the flip side, Pakistan’s exit from the ‘grey list’ appears unlikely in Jun’20, as gradua- tion from list would not only require completion of action plan but the country pass an on -site assessment test as well.
• While the development within the FATF review session was largely in-line with expecta- tions, the PSX may depict initial nervousness owing to perceived harshness of the state- ment. We believe any dip should be taken as an opportunity to accumulate, keeping a longer investment horizon.
Greylisting maintained with recognition of progress: In its Feb’20 review, the Financial Action Task Force (FATF) has retained Pakistan on ‘grey list’ – formally known as ‘Jurisdictions under increased monitoring’, while extending the deadline to deliver on the action plan by another four months (next review is in Jun’20).The decision was broadly in line with market expectations. The official stance was mixed, carrying both carrots and sticks. The tone was relatively soft com- pared to the last one, with the statement acknowledging the ‘notable improvements’ and no mention of ‘serious concerns’. With regards to progress on the action plan, Pakistan was largely compliant on 14 counts (vs. 5 in Oct’19) out of total 27. Of the remaining 13, a varying level of progress has been made, with partial compliance on 11 (vs. 17 out of remaining 22 in Oct’19) and little or zero progress on 2 counts (vs. 5 in Oct’19).
Outlook: With Jun’20 being the new deadline, Pakistan has four more months to complete its action plan. Assuming the gov’t replicates the last four months’ performance, Pakistan would be largely compliant on 9 more metrics, taking overall compliance to 85% (largely compliant on 23 out of total 27 categories). We believe this is not too difficult, as it would take little effort to turn partially compliant categories (presently 11) into largely compliant (presently 14). The probabil- ity of Pakistan dropping to the ‘blacklist’ officially referred to as ‘High-Risk Jurisdictions subject to a Call for Action’ is very low for two reasons, in our view. Firstly, Pakistan is making notable efforts to address the deficiencies and the FATF should not downgrade a country that is demon- strating significant progress, according to our understanding. We also draw comfort by looking at cross country experiences. Consider Brazil’s case, the country repeatedly failed to fully com- plete its action plan during 2016-2019 and missed several deadlines but continued to demon- strate the progress towards completing its action plan. Despite repeated warnings including FATF calling for a potential suspension of Brazil’s membership, the FATF did not downgrade Brazil. Secondly, steadfast support from friendly countries (i.e. China, Turkey Malaysia & Saudi Arabia) and improved Pak-US relations amidst ongoing peace efforts in Afghanistan should pro- vide the diplomatic support to avoid counter-measures as long as Pakistan continues to make visible progress on its action plan. On the flip side, the graduation from the ‘grey list’ is a long process – around two and a half years considering cross country experiences. The exit from the grey list not only requires the completion of the action plan but the country passing an on-site assessment test as well. So, Pakistan’s exit from the grey list in Jun’20 appears unlikely, in our view, as it has to first complete the action plan and then an on-site assessment. However, completion of the action plan by Jun’20 would pave the way for an exit from the grey list in Oct’20. A recent case in point in this regard is Trinidad and Tobago. The dual island Caribbean country completed its action plan by Oct’19 but graduated from the grey list in Feb’20 after the FATF’s team completed the on-site assessment. The same process was followed in Sri Lanka, Ethiopia & Tunisia cases before that. Syria and Yemen couldn’t graduate yet due to the same reason despite both countries compliant with the FATF’s recommendation since Jun’14.
Investment Perspective: While the development within the FATF review session was largely in- line with expectations, the PSX may depict initial nervousness owing to perceived harshness of the statement. We believe any dip should be taken as an opportunity to accumulate, keeping a longer investment horizon. Over the next quarter, we expect market to remain fickle pricing in FY21 budgetary expectations while directionally, any stability will be dictated by unfolding eco- nomic events, particularly on the policy rate side.
