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Pakistan's
stock market goes to town
By Nadeem
Malik
ISLAMABAD - Pakistan's liquidity-driven
stock market has for the second consecutive year emerged
as one of the world's fastest-growing. The benchmark
Karachi Stock Exchange (KSE) 100-Share Index closed at
4388.6 on Wednesday, up by more than 60 percent during
the year and having skyrocketed a phenomenal 240
percent, or 3,115 points, since January 2002.
Market capitalization is now about Rs 960
billion ($16.6 billion). There seems little to reverse
this surprising trend, although the killing last week of
Pakistani troops in the Waziristan Agency by American
fire temporarily ended a 15-week long bull run. The KSE
Index lost 180 points over the previous week's gain of
303 points. It is the first week since April 25 that the
market has corrected markedly. It then went on to
recover all losses during the current week.
More
than anything else, surplus liquidity has reduced
interest rates and provided a real boost to both
Pakistan's equity and real estate markets. The banks
have no better option but to invest in the market, where
the price/earnings ratio was a tame 9.8 x earnings, as
compared to 4.6 percent in the 10-year government bond.
Although there is fear that that market has gone
too far too soon, there is an eerie sense of well-being
at the macro level. While there is no substantial
indication that poverty is falling, Pakistan has US$11
billion in foreign exchange reserves, exports and
imports are growing rapidly and inflation is in check.
Cement has become profitable in the industrial
sector. After growing fast last year, July data show
another 10 percent annual growth. Cement exports to
neighboring Afghanistan are rising, with almost 8,100
tonnes of exports during July 2003. However, the return
of the cement cartel restricted capacity utilization to
74 percent, which kept prices higher and dampened
domestic demand to 3.8 percent. The auto sector posted
46.37 percent growth last year, with production of cars
and jeeps showing over 53 percent growth.
Given
these kinds of statistics, equities analysts see no
threat that the bubble will burst. The market is liquid,
interest rates are low and there are few investment
opportunities elsewhere. So market performance could
remain robust in the short to medium-term, provided
regional peace and security, and domestic political
stability, remain.
The one ominous sign is that
despite a spectacular rise in the stock market, foreign
investors aren't willing to go near Pakistani equities.
Foreign portfolio investment declined by half a million
dollars during July 2003. Foreign private flows during
the last fiscal year totaled a minuscule $820.1 million,
including $23 million in portfolio investment. Since
panic selling after nuclear tests of May 1998, most
foreign brokerage houses have remained on the sidelines.
Total foreign portfolio investment is no more than an
anemic $250 million.
Pakistan registered
relatively strong 5.1 percent growth last year. The
government's Gross Domestic Product (GDP) target for the
current fiscal year is 5.3 percent. Economic reform,
much of it designed with the help of multilateral
donors, has shown good results at the macro level,
although it has not yet trickled down to the poor.
Still, these signs, along with a stable democracy,
should help boost investor confidence to ensure
long-term sustainability of the markets.
"Prioritizing and accelerating judicial and
civil service reforms, and enactment of key legislation
through parliament would respond to the needs of
businessmen and of all Pakistanis," said Henri
Ghesquiere, International Monetary Fund senior resident
representative in Islamabad.
Addressing a
conference on combating corruption on Wednesday,
Ghesquiere observed that the ultimate success of the
reform strategy depends on substantial employment
creation through increased private sector investment. He
said a stable financial system and confidence in the
value of the rupee are essential, but not still
sufficient to induce businessmen to invest. He attached
importance to an accountable and transparent system.
Badla trade
The central bank's
move to check bank exposure limits in carry-over
transactions (CoT) put pressure on key financial
institutions which are in a rush to square off positions
before the reporting date. There are reports that some
institutions have crossed their exposure limits for
lending in the traditional badla, or bucket shop
market, which has been outlawed in other countries
because of the unaccountability of trades, which are
carried on after market closing hours. The central bank
directed all banks and non-bank institutions to provide
full details of their equity investments, which the
market has greeted positively, as it should give
investors a truer picture of their investments. No
formal statistics on badla trading are available
to prospective stock players.
Carry-over
transactions arise when markets are awash in liquidity
and there are more funds than there are people to borrow
them. Badla trade statistics that are available
show that after touching the highest-ever trading level
of Rs 23.5 billion on August 12, badla trade
volume fell from a high of 485.5 million shares on
August 12 to 445.7 million shares on August 15. That
brought down CoT investment to Rs 19.8 billion.
Weighted-average badla rates also came down to
12.8 percent on last Friday, after touching 17.2 percent
during the week.
Liquidity
At the
latest auction of six-month Treasury Bills, the State
Bank of Pakistan received bids worth Rs 55.95 billion,
against a target of Rs 32 billion, and finally accepted
Rs 36.5 billion at a cut-off yield of 1.27 percent, down
by 8 basis points. The accepted bids is just enough to
mop up maturing T-Bills and Pakistan Investment Bonds
(PIBs) worth Rs 32 billion, still leaving the market
flush with liquidity.
Yields on benchmark
three-month (1.08 percent) and 12-month (1.42 percent)
T-bills have already declined by 60 and 75 basis points
respectively, with little possibility that rates are
going to reverse any time soon. In fact, the market
expects the central bank's discount rate to also plunge
from the present level of 7.5 percent.
The State
Bank has already indicated that existing monetary policy
will remain intact in view of the visible benefits of
the low interest rate environment on economic activity
and inflation. Monetary expansion from July 2002 to June
28, 2003 remained robust at 17.56 percent or about Rs
309.34 billion, as against Rs 212.8 billion during the
same period of 2001-02. Public sector enterprises (PSEs)
retired Rs 13.67 billion debt during this period, as
against the target of new loans amounting to Rs 20
billion to support the cash flow position. Similarly,
the government retired Rs 64.78 billion, as against the
target of Rs 44.2 billion. Low interest rates helped
private sector credit off-take to total Rs 153.6 billion
last year.
Banks make money
Bank
sector earnings remain intact, as deposit rates fell on
saving accounts (PLS) to 1.5-1.75 percent, against a
weighted-average lending rate of 7.58 percent. Almost
half of the bank deposits are in savings accounts.
National Bank of Pakistan and Muslim Commercial Bank,
holding 33 percent of total bank deposits, offer a
meager 1.5 percent and 1.6 percent returns on PLS
deposits. The banking sector smartly passed on the
burden of low interest rate environment to depositors,
maintaining, or even in some cases increasing their core
interest-based earnings.
This also explains why
investments in the National Savings Schemes (NSS)
continue to rise, despite rapid reduction in the rate of
return. Savings schemes still offer substantially higher
yields, as compared to any bank scheme. However,
institutions have been barred from making investments in
the national savings schemes.
The declining
lending rates as a result have had no negative effect on
net interest margins, or NIMs, which remain protected
for the banks. Banking sector profits grew during 2002
and the trend is expected to persist in 2002 without any
major hit on earnings. There are also reports that
capital gains on investment are rising, which would
improve the overall profitability of the efficient
banks.
Commercial bank provisional profit was Rs
14.2 billion, while specialized banks lost Rs 1.1
billion in 2002. Accordingly, the return on assets and
equity of commercial banks improved to 0.7 percent and
13 percent respectively in 2002 as compared to a
negative 0.01 percent and negative 0.3 percent
respectively for 2001. The improvement in the
profitability of commercial banks over the last year was
the result of increasing net interest income,
non-interest income and the absence of extra ordinary
expenses as in previous years (like provisioning).
Supported by a strong flow of remittances to
$4.24 billion during fiscal year 2002-03, overall
banking sector deposits grew by 9 percent (Rs 146
billion) during first six months of 2003 to Rs 1,753
billion, and bank advances grew by 5 percent and
investments by 11 percent during the period under
review. Total advances of the banking sector totaled Rs
1.05 trillion, and and could accelerate further under a
new wave of consumer financing and auto loans.
In addition, the push for housing loans and
mortgage financing should push credit growth. So far,
only the National Bank of Pakistan has announced its
housing program. All other banks are expected to follow.
Remittances sent by overseas Pakistanis are expected to
maintain the current pace during 2003-04. Some $307
million flowed in in July, the same as received in July
2002.
Good corporate results
The good
results of the banking, auto and petroleum and chemical
companies further support market sentiment. Pakistan
State Oil (PSO), Pakistan's largest oil marketing
company, recorded growing profit on higher margins of
3.5 percent at rising international prices in the wake
of the Iraqi war. The expectation that PSO will be
privatized to a consortium of foreign investors in
October further is fueling buying interest.
Private sector giants like ICI have performed
even better, with half-year results showing profit of Rs
419 million profit, against Rs 227 million in the
corresponding period last year. Muslim Commercial,
Askari and Faisal bank are equally profitable. The
state-owned telecom sector is also doing well despite
recently announced deregulation policy.
(Copyright 2003 Asia Times Online Ltd. All
rights reserved. Please contact
content@atimes.com for
information on our sales and syndication policies.)
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