Bureau Chief, Islamabad

Sep 03 - 09, 2007

The stock markets in Pakistan have witnessed a sharp decline since mid July 2007. The KSE 100 Index came down to 12040 on August 28 from 14000 during the last six weeks thereby index registering a decrease of about 11 percent.

PAGE conducted a series of interviews and discussion with leading stock brokers of Islamabad Stock Exchange (ISE) and financial analyst and capital market experts to find out the reason for this sudden decline after a continued boom during the previous many months. (A responsible senior officer of the SECP was not available for comments/views on the issue)

There was a consensus that the major reasons for the present decline in the stock market include political uncertainty in the country, impending imposition of emergency and the worsening situation on Pak-Afghanistan border. Other reasons included US threats to hit Pakistani areas without permission, US legislation linking aid to Pakistan with performance in its war on terror, Supreme Court verdict regarding return of Sharif brothers and the resultant threats to the future of present set up of the government. Some interviewees felt that some faults were also partially attributable to steps taken by Securities and Exchange commission of Pakistan.

The gist of such background interviews and discussion with experts in reproduced below.

The Index shed 385 points on August 09, 2007 as investors indulged in panic selling on media reports of imposition of emergency. The market suffered a loss of Rs.115 billion as official denial came a bit late. The market, however, could have run into a deeper recession in case the emergency was declared by the president as it would signal the exit of leading foreign investors.

The investors have been conspicuous by their absence apparently awaiting more details about the details of the Benazir-Musharraf meeting in July 2007. The 100- Shares Index therefore remained unsettled and failed to establish any definite price pattern amid alternate bouts of buying and selling as the report of deal between the two leaders was still not confirmed. The market also faced the US threats of direct hits on the tribal areas, linking of the US aid to performance on the terror front and law and order situation were one of some depressants.

The market gave a mixed reaction to the verdict of the apex court on the return of Sharif Brothers to Pakistan. Although majority thinks that Ms. Benazir and Nawaz Sharif were considered chief exponent of the private sector as they had introduced number of reforms in their tenures aiming at encouraging the private sector, but some were of the view that their return to the country could further intensify the political polarization as contenders of the power would try to outwit each other. There has also been perception that the apex court's verdict of allowing Sharif brothers to return to the country could have far reaching impact on the future political scene.

The pre-meditated speculations of the imposition of emergency have created a commotion in all the segments of the society, including the business circles. Some players in the government first aired the speculation of emergency, but at a later stage the government ruled out the enforcement of emergency after seeing wrath of the people, politicians, lawyers and panic in the business community. Some quarters of the society still fear that the rulers could exercise this option anytime before the Presidential elections.

How disastrous emergency state is for the economy can be imagined from the fact that the emergency reports eroded over one hundred billion rupees worth capital of the Karachi Stock market in just one day. The KSE-100 index closed down by 385 points, after hitting the lowest mark of 660 points during inter-day trading on August 9, 2007. The stock market showed some signs of recovery when the government denied the imposition of emergency. The business circles in the country felt a shock after hearing that the government might resort to the enforcement of emergency.

Most of the businessmen and financial analysts opined that the emergency option could erode the confidence of the investors and business community and it could prove disastrous for the economy and the existing friendly-investment climate.

The ongoing wave of suicide attacks, clashes between the security forces and militants and the poor law and order situation have already panicked the investors, businessmen and industrialists.

The stock market, foreign investment and governance would face a major setback in case the rulers resorted to the extreme measure just to prolong their rule, say the analysts. They say the political uncertainty, judicial crisis, gory suicide attacks have already made Pakistan a laughing stock in the world and the imposition of emergency would have ignited more trouble, for the rulers and for the countrymen, a capital market analyst said.

Despite troubles the economy of the country has been showing strength and moving smoothly so far and the rulers must not opt to the extreme measure which could undermine the growth of the national economy and damage of the image of the country. The best way to sustain growth is that the rulers should set-up a neutral caretaker government and ensure that the upcoming general elections are held in a fair and free manner.

In 2006-07 the country had received a record foreign investment of over 8 billion dollars, the highest-ever. It also includes around one billion dollars portfolio investment at stock market, which is unprecedented in a year. Most of the analyst are of the view that the declaration of emergency state in the country will negatively affect the stock market as seen on August 09, 2007 when rumours derailed the market and in spite of all dynamics and strong fundamentals equities fell like nine pins and panic gripped the entire stock market.

With a market capitalization of almost 4 trillion rupees (US$6.6b), average daily turnover of 267 million shares and dividend yield of 5 per cent and PE of 10.34 (based on 2008E) and above all the SCRAs of US$978 million in 2006-07, if the speculations come true, it could be terrifying situation for the economy as well as for capital markets point of view.

The stock market had already witnessed an outflow of 87 million dollars from July to August 9, 2007. In the current month, by August 9, the foreign investors have ejected 18 million dollars from the market and the outflow of foreign investment would trigger further in case the rulers derailed the democratic process for their vested interests.

The KSE has taken heavy toll in emergencies in the last two instances in 1998 and 1999 in which market lost 12 per cent and 7 per cent, respectively. This time market has a major portion of foreign inflows. So the impact will be very adverse if emergency is imposed by the rulers, say the analyst. If such situation arises as is being speculated these days if no reconciliation takes place, then foreign inflows may stop and market will get weaker day by day due to the stock burden. All dynamics, fundamentals, regional markets comparisons yields may vanish in front of emergency rules.

Moreover, some steps taken by the SECP have also affected the stock market environment. The Commission is introducing a new Code of Conduct for Brokers, which will contain provisions for strict action against the brokers. The Demutualization Ordinance is also being criticized by the brokers. The KSE Demutualization Committee has directly written to the President about their un-satisfaction on the provisions and that they have not been consulted on most of the issues.