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  1. The KASB review
  2. Finex week

An exclusive weekly Stock Market report for PAGE by Khadim Ali Shah Bukhari & Co.

Updated on Nov 08, 1999

Market Update

As we had stated in the last weekly, the market continued to move slowly towards over the week. The KSE 100 inched up 0.3% points over the week to close at 1193.54 points at the end of the week. The failure to break the 1200 levels displayed the inherent and fragile nature of the market.

Institutional investors continued to remain apprehensive towards the current situation, utilizing the current levels to reduce exposure in the KSE 100, Market sentiments continued to remain under pressure, leading the current wave of anxiety is the apparent vacuum of power. With the announcement of the new six members of the Cabinet, investor concerns maintaining to this apparent delay will largely subside.

Foreign investors absence in the rings have been witnessed clearly in the last weeks. The military takeover has made them awry of any further exposure in the market. Even with the positive statements on the early solution of the IPP issue by the Finance Minister Shaukat Aziz, the price of Hubco GDRs remained capped on the upside thus further validating the apparent anxiety of the foreign investors towards the Pakistani market.

For the coming week, the KSE 100 is likely to witness major support appearing around the 1150 levels. Initial resistance is likely to be felt around the 1200 levels with major resistance clipping the upward movement by 1220 levels.

Economic Overview

The Anguish Of An IMF Debtor Nation

Whenever one hears about the release of IMF funds to Pakistan, there has almost always been an underlying conditionality of devaluing the Pakistani Rupee. The immediate reaction in the country is that the IMF is unaware of the ground realities in Pakistan, and that the external account will suffer as a result of the devaluation. Well here's how the IMF decides whether a member country needs to correct its currency.

The current account balance of a country is referred to as an intermediate target, meaning a variable, which is both a broad reflection of the stance macroeconomic policies and a source of information about the behavior of economic agents. The country's balance on current account determines the change over time of a country's stock of net claims on (or liabilities to) the rest of the world, it reflects the intertemporal decisions of domestic and foreign residents, that is their behavior with respect to saving, investment, the fiscal position and demographic factors. Movements in the current account are, therefore, deeply intertwined with, and convey information about, the actions and expectations of all market participants in an open economy.

The first step consists of estimating the current account balance that would be likely to exist for the country under consideration if, at the currently observed market exchange rates, the country is at a normal level of capacity utilization and all lagged effects of past changes in exchange rates, prices, relative activity levels and special and temporary factors had fully worked themselves into the current account (in Pakistan's case this would be around a 3-4 month lag period). This would give the underlying current account position.

The second step in their calculations involves working out the sustainable level of the saving-investment gap in the economy. This is the level that would be consistent with long-term equilibrium if the home country and its trade and financial partners were all functioning with low inflation rates and appropriate rates of capacity utilization, that is a current account position that can be financed by 'normal' capital flows. This is calculated excluding any impact the exchange rate will have on savings and investments.

The third step entails estimating the level of the country's real effective exchange rate that would equate (1) as estimated in the previous steps and comparing it to the prevailing market exchange rate levels. Should these two sides be wide apart, then it is necessary estimate the exogenous real exchange rate needed to equate the two sides.

Having done that, one will have a measure of the misalignment of the country's real exchange rate from the sustainable level, and hence a policy recommendation for the country's exchange rate.

The all-important relation being:

Sustainable Current Account = Saving PRIVATE + Saving PUBLIC

- Investment PRIVATE - Investment PUBLIC (1)

Finally our opinion regarding depreciation of the Pakistani Rupee for CY00 calls for a depreciation of 4-5%, because the government emphasis currently lies on fiscal sustainability, which would only be hampered by the effect of a large depreciation on the rupee value of debt-servicing. We believe that the 4-5 % depreciation if done in a random spread-out manner (to limit the negating affects expectations as much as possible) will keep real exchange rate fundamentals stable, so large realignments will not be necessary (unless we decide to test our chemical warheads too!!!).