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Foreign investors and the Pakistan stock market

If an analyst examines Pakistan’s economy in detail a few points are evident: 1) despite many odds the country has remained a preferred destination for the foreign investors, 2) once entering into Pakistan hardly any foreign investor has left the country, 3) previously foreigners used to make direct investment in industries, but now they prefer to buy shares of blue chip companies, and 4) foreign funds/investors owns nearly one third of the total free-float of listed companies. Overseas investors have also learnt a few lessons from the sudden and abrupt changes in the policies of the Government of Pakistan (GoP).

Keeping in view: 1) Pakistan’s total population – now exceeding 200 million, 2) strength of the infrastructure and robust telecommunication sector, 3) Islamic banking and Shariah compliant mutual funds and 4) energy shortfall, the country continues to attract the attention of foreign investors. However, inconsistent policies and focus on revenue collection, rather than on adding new productive facilities and creating additional job opportunities keeps the local investors shy. Economic analysts say that if the local investors are shy, no country should expect the foreign investors to invest there.

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The above pie chart picked randomly indicates the top largest sectors in terms of trading. Buying/selling of the shares of the listed companies is driven by the economic policies of the government, the performance of these companies and future outlook. There is a basic difference in the investment strategy of local and foreign investors. While local investors pay more attention on the dividend payout history, the prime focus of foreign investors is earning potential of the companies. A review of some of the key sectors could help the policy makers to understand the need for making the policies attractive for the local and foreign investors.

Pakistan is among the top five largest cotton producing countries of the world, but its share in the global textiles and clothing trade is dismal, around two percent. Over the years, many of the leading global textiles and clothing manufacturers have either established their manufacturing facilities in the ‘third world countries’ or opted for ‘outsourcing’. However, Pakistan has failed on both the fronts. Lately, Chinese investors have established textile manufacturing facilities in many developing countries, but have mostly abstained from choosing Pakistan. Keeping in view that over 60 percent of Pakistan’s export proceeds comes from textiles and clothing, all the stakeholders must find out the reasons for the dismal performance of textiles and clothing sector and incorporate structural adjustments. A point also worth mentioning is that Pakistan has also failed in benefiting from GSP Plus status granted by the European Union, one of the biggest buyers of textiles and clothing from Pakistan.

Pakistan needs billions of US dollars investments in exploration and production (E&P) sector, to exploit the true potential of the country. The country remains heavily dependent on import of crude oil and POL products. Most of the E&Ps operating in the country belong to the public sector, which were established decades ago. These companies spend less on exploration and production to add production, but pay huge dividends to help the government in meeting the budget deficit. The E&P companies enjoy special attraction for the foreign fund managers because of the colossal dividend payment year after year. The bulk of the shares of these companies is still owned by the GoP. The performance of E&P companies is also marred by the looming circular debt issue.

Pakistan also suffers from prolonged outages of electricity (load shedding). It is partly due to inadequate generation capacity, but mostly due to highly depleted transmission and distribution networks. This encourages the consumers to pilfer electricity, taking the advantage of overhead lines. Hub Power Company (HUBCO) is the first and the largest IPP established in Pakistan. Initially it suffered the most because of litigation and now due to the circular debt issue. Kot Addu Power Company (KAPCO) was privatized but its performance has been marred by non-supply of low sulphar furnace oil/gas and also the circular debt.

The real culprits of the power sector are distribution companies (DISCOS). These entities have failed in containing pilferage as well recover outstanding dues. While some of the sector experts attribute this dismal condition to the depleted network, others term the blatant theft going on with the connivance of the staff of the utility companies. Since the process of privatization began in the early nineties the efforts are being made to privatize DISCOS, but have been frustrated due to the lack of the will of the government and resistance by the employees, who term privatization of these entities against the national interest.

Foreign fund managers have made substantial investment in urea manufacturing companies, on the basis of earning potential but now regret their decision. It was highlighted in one of the stories printed in this magazine that during the year 2016 the actual production of urea remained a little less than 6 million tons. It is evident that the actual production urea of the two major players was far below optimum capacity utilization, Fauji produced 2.955 million tons urea as against its capacity of 3.148 million tons. The worst performer was Engro, producing only 1.881 million tons against a capacity of 2.275 million tons. Operation of plants with far lower capacity can be attributed to the suspension of gas supply. However, a bigger concern is that the inventory as at June 30, 2017 was reported at 1.1 million tons. Therefore, under the prevailing circumstances – supply glut – even if the manufacturers get the full gas supply, it would be difficult for them to operate plants at higher capacity utilization. The top priority should be to facilitate the manufacturing in faster depletion of inventory. While a talk has been going on to offer subsidy on the export of urea, the GoP does not seem ready to cut the percentage of GST charged on urea and reduce corporate tax payable by these manufacturers.

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