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Ousted prime minister's brother set to take reins of power in Pakistan

Future court proceedings could still create potential political chaos

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Shahbaz Sharif, Chief Minister of Punjab Province and brother of Pakistan's resigned prime minister Nawaz Sharif, gestures after appearing before a Joint Investigation Team in Islamabad, Pakistan June 17.   © Reuters

ISLAMABAD -- Shahbaz Sharif, the chief minister of Punjab, Pakistan's largest province, is expected to replace his ousted elder brother Nawaz Sharif as Pakistan's prime minister in a power transition that could calm investor jitters ahead of a scheduled general election in early 2018.

The younger Sharif was anointed as prime minister by his brother and will be formally nominated as prime minister by the second half of September if he wins the safe National Assembly seat that was vacated on July 28 by the elder Sharif, who was forced to step down after the Supreme Court ruled that he was disqualified from holding public office because he failed to fully disclose his overseas financial assets. The court said the prime minister had failed to meet the constitution's requirement that elected officials should be "honest and upright."

Shahid Khaqan Abbasi, a former petroleum minister, is expected to be installed as interim prime minister by the ruling Pakistan Muslim League-Nawaz (PML-N) party, which has a sizeable majority in the lower house of parliament.

Shahbaz Sharif's assumption of power would signal the continuation of the ruling party's growth-oriented economic policies. "More important than Nawaz Sharif is what he represents - an understandable economic policy. If power is transitioned to someone who represents a similar economic policy, like his brother Shahbaz Sharif, the [stock] market would probably rise strongly," said Mattias Martinsson, chief investment officer of Tundra Fonder, a Stockholm-based asset manager working in frontier and emerging markets.

The PML-N is "Pakistan's most investment-friendly and pro-business mainstream political party", said Asad Ali, Asia country risk analyst for IHS Markit, a research company, in a briefing note. "Opposition parties do not have the same policy emphasis."

The prime minister was toppled for lying about the source of his family finances, which were moved from three Gulf Arab countries through Panamanian offshore companies to buy high-end properties in London. The Sharif family's offshore companies were revealed in the leak in April 2016 of the so-called "Panama Papers" from law firm Mossack Fonseca.

Sharif and his three adult children have been ordered to stand trial on charges of corruption, money laundering and fraud, with a verdict expected by mid-March.

In deciding to disqualify Sharif without a prior conviction by a trial court, the Supreme Court has established a sweeping precedent under which the legal onus will be on elected politicians to establish their innocence without recourse to an appeal court.

The questionable grounds for Sharif's dismissal "create uncertainty in the minds of investors as regards stability," said Kamran Bokhari, director of strategy and programs at the Center for Global Policy, a Washington think tank that promotes relations between the U.S. and Muslim societies. "But then some may read this as a sign that the judiciary is being strengthened and that, in some ways, helps build investor confidence that corruption is being brought under control," he told the Nikkei Asian Review.

"I would say those two processes cancel each other out, leaving investor confidence as not much different from where it was previously. There will certainly be the media noise for a while, but then we will have a new normal set in," he added.

But concerns remain that a broadening of the judiciary proceedings could still upset the political situation. Supreme Court hearings are continuing against opposition leader Imran Khan and Jehangir Tareen, a key Khan aide and financier of his Pakistan Tehrik-i-Insaf (Movement for Justice) party. A corruption investigation is also being conducted against Shahbaz Sharif, which could potentially leave him vulnerable to disqualification.

Pakistan's powerful army moved to assure China that the next civilian government will proceed with planned Belt Road Initiative projects in Pakistan, backed by $62 billion in investments by Beijing, up to 2030.

The army has directly ruled Pakistan for about half its 70 years of independence and dominates the country's political landscape as well as decisions on foreign and security policy.

"The Pakistani army has consistently provided China with assurances - publicly and privately - that it is committed to ensuring [the China-Pakistan Economic Corridor's] success, and does so even more actively when there are political disputes or challenges facing the civilian government," said Andrew Small, a fellow at the Washington-based German Marshall Fund and author of The China-Pakistan Axis.

Pakistan's economy grew by about 5.2% during the 2017 fiscal year, which ended on June 30, on the back of Chinese infrastructure investment and strong domestic consumption.

It is forecast to reach 6% by fiscal 2020, upon the completion of $19 billion of "early harvest" power generation and other infrastructure projects under the CPEC program.

"We believe that the China-Pakistan strategic cooperative partnership will not be affected by the change of the situation inside Pakistan," Chinese Foreign Ministry spokesperson Lu Kang said in press briefing.

The KSE-100, Pakistan's main stock market index, initially lost 3.6% in value in trading after the court decision, but closed marginally up at 45,912 points on hopes that the ruling would end the 15 months of political instability that has followed the Panama Papers disclosures.

The KSE-100 Index is currently trading at a 15% discount from its all-time high of 52,876 points on May 24. That record was set thanks to the Pakistan Stock Exchange's inclusion in the MSCI Emerging Markets Index as of June. Brokers in Karachi are hopeful that the index will recover to 50,000 points by the end of the year. "With clarity now at hand, we expect politics to take a backseat and market fundamentals to start dictating sentiments on the bourse," said BIPL Securities, a Karachi-based brokerage, in client note.

The Supreme Court also ordered corruption proceedings against former Finance Minister Ishaq Dar. This triggered a fall in value of the Pakistan rupee against the U.S. dollar in the belief that his departure would signal a devaluation. Dar had opposed a rupee devaluation despite mounting pressure on Pakistan's foreign exchange reserves resulting from a spiraling current account deficit.

The International Monetary Fund earlier this month estimated that Pakistan's current account deficit has reached 3% of gross domestic product from 1.2% in fiscal year 2016.

Martinsson said an important long term effect from the cases against Sharif and other politicians is that "investors would be satisfied that an independent judiciary - coupled with public opinion - has mustered the capacity to hold Pakistan's elected leaders accountable on charges of accumulation of wealth beyond known sources of income."

"In frontier markets, the investors are quite aware and yet wary of potential rife-ness of corruption among the ruling elite and a historic judgment on such matters is a material positive for Pakistan's economy in the long run that sets very strong precedent and high governance benchmark," he added.

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