!logo.jpg (6328 bytes) . .

1_popup_home.gif (1391 bytes) cover.gif (6176 bytes)

Cover Story

An interview with Ibrahim Masud, Head of Research, KASB

Dec 06 - 12, 1999

Khadim Ali Shah Bukhari & Co., (KASB) is one of the oldest and the largest brokerage house of Pakistan. It also acts as portfolio manager and custodian for the foreign investors. It has been preparing extensive research reports in collaboration with Merrill Lynch. Ibrahim Masud is the head of research at KASB. Following are the excerpts from his interview with PAGE.

It will not be fair to base the analysis of foreign direct investment (FDI) and particularly portfolio investment on the performance of last couple of years. At the best, the year 1998 was influenced by a lot of external factors and events — even beyond the control of the GoP. Still the results were not disappointing. However, when one starts from the opening of Pakistan market in early nineties, the results are a source of concern. Pakistan was among the top few fastest emerging markets of Asia and also managed to attract significant investment but very shortly the process was derailed.

Still, the situation does not present a disappointing performance. There are two factors to be looked at, trading volume and market capitalization. When Pakistan's capital market was bullish, in early nineties, the average daily trading volume ranged between 30 to 40 million shares. Currently the transactions in the shares of a single company exceed this volume. However, the real issue is that during this period the market capitalization came down from US$ 14 billion to US$ 8 billion with lowest being US$ 6 billion when the KSE-100 index was around 800 point.

The other indicator, listing of new companies, exhibit really dismal figure. The number of listing during the last two years can be counted on the fingers of two hands and most of the issues remaining under subscribed. Interestingly TFCs of around Rs 15 million were floated during this period and some of them were oversubscribed. This indicates two points, investors not being keen in investing in equities offering higher risk and companies with strong cash flow preferring to raise money through debt instruments of limited tenure but offering return comparable with the return on government securities or even higher than that.

Poor dividend payout by listed companies is said to be one of the reasons for keeping the investors away from the capital market. But the real reason is 'corporate debacles'. Mehran Bank scandal was the result of poor governance, but Pak Elektron was victim of non-payment by WAPDA and PEL a prey of unchecked smuggling. Similarly, poor profitability of PSF and cement manufacturers was the result of over-supply/poor off-take.

The general perception is that dividend payout improved for the year 1998-99. However, it is only the outcome of recently promulgated law regarding tax on reserves. The companies which were retaining the profit without any reason, now prefer to pay higher dividend to minimize the tax liability. However, the companies which want to finance BMR and expansion projects from internal cash generation will find it difficult to retain the earnings. They will be forced to borrow subsequently. Therefore, there is a need to amend the law to facilitate BMR and expansion from retained earnings.

Foreign investors are keenly observing the forex management policy and capital controls in Pakistan. The continuation of these policies is linked with the forex reserves of the country, prices of commodities being imported and exported and normalization of relationship with the multilateral lenders. It is expected that after the restructuring of external debts, the balance of payments will improve. However, hike in international prices of crude oil and decline in cotton price are expected to widen the trade deficit.

While it is often said that political instability is a factor responsible for the poor inflow of FDI, it is not the real reason. The inconsistency and poor implementation of policies are the two issues. Pakistan has often come up with attractive policies but no sooner did the policy announced amendments and different interpretations distorted them. Pakistan opened the market much earlier than India but has received far lesser investment though India also suffered from political instability.

Even when it is said that FDI was low, it has primarily come due to the nature of the projects and credibility of the local sponsors. Therefore, it may be said that FDI has come, despite adversities because the investors were willing to take equity stake in economically viable projects. Unless the local sponsors take the lead prospects for foreign investment will continue to remain bleak.