An interview with Ibrahim Masud, Head of Research, KASB
By SHABBIR H. KAZMI
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
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