However, when it comes to global ETFs (exchange traded funds) that track two emerging economies--India and its next-door neighbour Pakistan--the performance of India-focused ETFs clearly stands out.
iShares MSCI India ETF, which is the largest India-focused ETF, has delivered 47% returns in last five years. On the other hand, Global X MSCI Pakistan ETF has delivered negative 20% returns in same period.
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Why such a wide gap?
Different economic trajectory
India recently became the fifth largest economy in the world, surpassing the UK, with its GDP rising to $3.53 trillion.
Pakistan’s GDP stands at $383 billion, with the country ranked at the 40th spot in terms of the size of an economy, shows data from global statistics tracker worldometers.info
There are many factors responsible for Pakistan’s weak economy. Over decades, it has depended on global bodies like the International Monetary Fund (IMF) for aid and to fund its widening fiscal deficit. A country’s fiscal deficit is the difference between its expenditure and revenues.
On the other hand, Pakistan has not managed to reform its tax system, which is a critical source of revenue for any country. Debt-servicing obligations, along with falling exports, have kept the fiscal deficit high for Pakistan. The country's large informal sector also remains out of the tax net. Recently, Pakistan again approached IMF for aid as it has less than two months of foreign reserves left to pay its import bill. While the final approval is yet to be given by IMF’s executive board, the agency has had a staff-level agreement on extending its fund facility.
India, too, has a high fiscal deficit, but it has widened its tax collection base through reforms such as Goods & Services Tax (GST), formalisation of the economy and stricter implementation of tax collection mechanisms. While there are still gaps, this has helped India keep its fiscal deficit in check. At the same, it has managed to build strong foreign exchange reserves ($545 billion, the fourth largest in world) to help its economy during difficult periods. The government has relied on market borrowing, rather than external agencies, to fund its fiscal deficit.
Impact on currency
Large foreign reserves, as well as better management of fiscal deficit, has helped India in the currency market over the years.
The Indian rupee has depreciated 20% against the US dollar over five years, while Pakistan rupee has depreciated 53% over the same period.
This is despite Pakistan’s central bank using its reserves in the past to protect its currency, by selling borrowed dollars at cheaper prices.
However, the currency has continued to tumble, trading at PKR 238 against the dollar. Currency weakness has added to the inflationary pressures, with inflation hovering close to 25% in 2022.
Sovereign ratings
To make matters worse, Pakistan also faced severe floods in June this year, which further hit its economy and led to a huge humanitarian crisis.
Amid worries over Pakistan’s ability to meet its debt obligations, Pakistan’s bonds have seen volatility in the global bond markets. Over the last one year, the yield on the Pakistan’s 10-year bonds has moved up by 276 basis points, currently sitting just over 13%. In the last two years, the yield on Pakistan’s 10-year bonds has moved up by 347 basis points.
Global rating agencies have either revised their outlook on Pakistan to negative or brought down their ratings. At present Fitch, Moody’s and S&P’s sovereign credit rating for Pakistan stands at B-, which is considered speculative or non-investment grade.
India, on the other hand, has investment grade rating of BBB- from various rating agencies. In its rating rationale report last month, Moody’s said its stable outlook on India stems from its view that risks of “negative feedback" between the Indian economy and financial system seem to receding.
The rating agency said that banks and non-bank financial institutions (NBFIs) pose much less risk to the sovereign than previously anticipated, due to higher capital buffers and greater liquidity. This would facilitate the ongoing recovery from the pandemic.
