Updated on Oct 18, 1999
Market Update
The KSE 100 was headed only one way over the course of the week: down,
a week which saw the KSE take a dive of 8.63 % dropping by almost 107 points to close the
week at 1129.17. However the market would have taken strength from the fact that the
positive trend being witnessed over the last few weeks subsided the apparent bear run
witnessed on the day the market opened after the change in government. Though despite the
economic and political uncertainty prevalent over the market, the market has demonstrated
positive trend, mostly being liquidity driven.
Despite the fundamentals remaining under pressure, which saw the KSE
100 fall by 92 points in a single day, the KSE 100 closed on Friday on a positive note.
Though the market did not open for the first half of trading and dropped 60 points upon
the resumption of trade, positive elements in the later half of the trading time witnessed
the market recouping the losses by 50%. This could also be attributed to the announcement
of certain policy decisions, thus subsiding the apparent vacuum of authority after the
dismissal of the previous government.
Dispelling the apparent panic selling of Thursday, the market would
soon find its bottom line in the near future from where future strategy could be worked
upon. For the following week we feel that initial support is likely to arrive near the
1080 while major support is likely to appear at the 1000 levels. Resistance will be felt
near the 1140 while major resistance will be encountered near the 1180 levels.
Sector Review
Pak Suzuki Motors: Competition looms large ahead
Being the largest assembler of motor vehicles, Pak Suzuki Motor Company
tends to reflect the true nature of the automobile industry, primarily in the small car
segment.
In the course of time, the automobile market has witnessed a volume
decline in the number of units sold. This unhealthy phenomenon could be attributed to two
primary reasons,
1. Undeterred price increases.
2. Consumer reluctance for buying new cars in the anticipation of the
arrival of new entrants in the small car segment.
In both the cases Pak Suzuki has found itself in a tight squeeze.
Though the decline in volumes is across the board, the apparent decline in the sales of
the smaller car segment is of greater concern.
With an average monthly production of 1375 units witnessed for the
Mehran during FY 98-99, the company has only been able to produce 779 and 223 units for
the months of July and August 1999 respectively.
However to counter the stigma attached of Suzuki being awry of any
model change, Plans are afoot to introduce a totally changed shape of the Suzuki Khyber in
March 2000. This could provide Suzuki the burst of adrenaline it so much requires. Adding
to their advantage will be the fact that the various new entrants will also be in the
process of entering the market.
On the flip side, Suzuki has yet again been made the scapegoat of
ambitious government plans to instill some activity in the economy. Under the much
publicized National Transport Scheme, the previous government of Nawaz Sharif had
introduced Suzuki Mehrans as Taxis. For this particular purpose, PAK Suzuki produced 450
exclusive units for this scheme, of which only 60 were paid for and delivered. Due to the
sudden change in the political climate and the removal of the said government, Pak Suzuki
are left with 390 units, the fate of whom is left very much hanging in the balance. In
addition the government has also announced the imposition of LC margins on the import of
various goods. Under this new arrangement, all the local assemblers will have to pay 10%
LC margins in addition to the current taxes in place on the import of CKDs. This is
unlikely to go down well with an industry already facing a volume decline. Assemblers
having a higher deletion level will be able to squeeze through these trying times as
compared to the new entrants about to enter the market. A definite positive for Pak
Suzuki.
However even with Pak Suzuki enjoying a relative advantage over the new
entrants due to a higher deletion level, the appreciating yen will continue to keep prices
under pressure, the single most important variable in the smaller car segment.
The fact that the other assemblers would be importing CKDs from Korea
and other countries, thus the relatively calmer Won is likely to add to the anxiety being
faced by the management of Pak Suzuki.
With the actual implementation of the Section 9-A, through which
companies are forced to pay out dividends, we could not rule out a decent dividend payout,
a quite attractive notion given the current low levels of PKR 19. Stay tuned for updates.
Economic Review
Military parade goose-steps over Pakistan economy's grave
In the flurry of policy initiatives, which took place under the new
administration of the country, the SBP initially announced the imposition of a cash margin
on Letters of Credits:
1 10% on industrial raw materials,
2 20% on machinery
3 35% on all other items (not including imports like petroleum and
wheat).
This and the closing of financial institutions on the 13th,
money-changers till the 20th seem to point towards a standard plan of action following a
political crisis in the economy, note the similarity of these policies with the actions
following the nuclear test last year.
The focal point again seems to be in the maintenance of the forex
reserves and exchange rate against the onslaught, which inevitably follows any uncertainty
in the country. Given the trade situation with a trade deficit of $ 450 mn posted in the
first quarter of this fiscal year, and the indefinite postponement of IMF credit.
An interesting thing to note is that Pakistan's demand for imports is
so inelastic and our Marginal Propensity to Import so rigid that even the most drastic of
measures hardly touch our imports, if you look at the figures the last time such
restrictions were put in. But it is also important to bear in mind that the dual exchange
rate had an effect of making cheaper food and edible oil imports, which did go up in the
June 98 period. What does suffer is the exports emanating from Pakistan, which are
dependent upon industrial raw material imports. So this move could well put further
pressure on our reserves, going by past experience, but only time can tell. One lesson
seems to have been learnt though, in that the cash margin for import of industrial raw
materials is below the other categories at 10%.
The SBP followed up on this on the 15th by ordering all banks to stop
issuing L/Cs over $25000, unless prior approval is taken from the SBP. This will
definitely curtail imports, if not postpone non-essential imports for a period of 2-3
months. This spells doom for importers of items such as fertilizers which Pakistan has
capacity to produce internally, and better forecasts for those companies which are hit by
foreign competition for these items.
On the forex front, the banks have also been ordered to stop all
back-to-back remittances and forward trading. The banks have been allowed to maintain
their position on the inter-bank market, but have been clearly told not to issue new
rates.
What seems to be different from the scenario following the nuclear
tests, is that the SBP seems to have been given a target and a free rein on how to achieve
it, unlike the political perspective intertwined in decision-making before.
The SBP was also active on the OMO front on the 14th, releasing Rs 8
billion into the market obviously in a bid to keep interest rates low and stable.
The declaration of emergency and the PCO giving Chief Executive powers
to the COAS is definitely not going to be well received by the US and we can count on an
indefinite postponement of IMF credit, and the continuation of sanctions which US
President had recently been given waiver authority over. Though news on the US's reaction
is still not clear, the threat of sanctions (on countries which have had a military coup)
being thrown around are redundant as the most stringent of these are already in place for
Pakistan.
The outlook for the economy over the next calendar half-year does not
look good, with a further slow-down in economic activity on the cards. The uncertainty on
the investment front will continue. What the economy desperately needs are credible
statements on the future economic policy of the new administration, which are more likely
to be believed than those of the deposed government.
