July-September 2017 quarter may be termed one of the worst spells of Pakistan stock market. It was mainly due to the ongoing political saga indicating growing conflict between the ruling Junta and the institutions. Events like imposition of penalty on Habib Bank Limited (HBL) in the United States on violations of the rules and the court’s verdict against National Bank of Pakistan (NBP) in pensioners’ case made investors jittery. The growing concerns are that very few analysts have the slightest idea about the pace at which Pakistan is inching towards default on external debt servicing, thanks to the mindset of the administrative regime that has the habit of sweeping the problems under the carpet. Since nearly 30 percent of free float is owned by the foreign investors, the erosion in the benchmark index could become too difficult to contain if they start selling at a massive scale. The recent selling by foreigners was partly absorbed by the local investors, but there has to be a limit.
Political uncertainty is the worst enemy of the equities market as the small investors are first to take an exit, after losing part of their life savings. A closer look at the graph indicates that at the beginning of the quarter the benchmark index of Pakistan Stock Exchange (PSX) was at 44,665 level and mostly remained on upward trajectory during July. It touched the highest level of 47,084 on 3rd August, a low of 40,958 on 7th September and closed the quarter at 42,409. A point worth noting is that July-September period is the results season, during which most of the listed companies following financial year announce full year results and those following calendar year release half yearly results, mostly accompanied by final/interim dividend.
According to an analyst, bulk of the daily trading volume pertains to less than two dozen companies belonging to E&P, OMC, Banks, IPPs and Fertilizer sectors. During the quarter under review all these sectors remained under pressure. E&P were mainly the victim of low international prices of crude oil. While OPEC members led by Saudi Arabia made consistent efforts to contain the global glut by curtailing output, production in the United States hovered around the highest level. During the latter part of the quarter refineries on the coastal belt had to be closed for a while due to hurricanes. In September, prices increased with the resumption of work by the refineries but its impact would become evident with a time lag.
Despite the tall claims of the government, the energy sector continues to suffer from circular debt and the worst victims are oil and gas marketing companies. The retail sale of POL has increased substantially due to the low prices but companies supplying furnace oil to the power plants continue to suffer due to long delays in receiving payments. The largest oil marketing company, Pakistan State Oil Company (PSO), which is also known for paying huge dividend, continued to face liquidity crunch. The situation is also not very different for the gas marketing companies (Sui Twins), which are the victim of huge leakages but more importantly blatant theft. The twin issues can be attributed to depleted distribution lines and connivance of the employees in the theft. The most regrettable observation is that gas marketing companies, suffer from severe financial crunch due to the circular net are unable to revamp their fast depleting transmission and distribution network.
As stated in the beginning, selling in two of the six ‘Big Banks’ namely HBL and NBP, put the banking sector under pressure because the haunting memories of KASB Bank still haunts the investors. Analysts are of the view that both the banks seem to suffer from lack of prudent risk management, corruption and inability to punish those involved in the corruption. They even go to the extent of saying that despite privatization, banks continue to carry a huge baggage of non-performing loans (NPLs). Though, the regulators and players claim reduction in NPLs, it is only because of the shift to huge investment of banks in risk-free government securities from lending to the private sector.
Worst is the case of fertilizer sector, till recently manufactures were carrying over one million tons of urea inventories. Though, the government announced to pay subsidy, there were exceptional delays in the payment. The government also announced to pay subsidy on export of urea but all in vain. Experts say that plunge in prices of commodities has adversely affected the purchasing power of farmers. Despite increase in inputs cost, the government failed in raising purchase price of wheat. Sugarcane growers are also victim of delay in payment by the sugar mills, which are also carrying huge inventory and also suffer from inability to sell surplus sugar in the global markets. There seems something grossly wrong with sugar industry. According to an analyst, mills are forced to pay high price of sugarcane to the growers but remain incapable of raising price of sugar.
Since the next general elections are scheduled in 2018, analysts fear that the ruling parties are likely to announce ‘popular policies’ to attract their vote bank. They also fear that the country would plunge deeper into budget deficit, balance of payment crisis and confidence deficit. While the cronies may succeed in obtaining bank credits, the recovery of these loans would remain dubious.