Updated November  06, 2003



The KSE-100 Index continued its upward march, with a 6% rise on a WOW basis. The first session after the long Eid holidays started off very well, as reflected by the high volumes and the largest single session jump (195points) since September. President Musharraf's announcement with regards to air links with India, optimism with regards to the resolution of the LFO issue and rumors regarding PSO's privatization on the




back of strong institutional activity created the perfect recipe for a strong start. Tuesday saw profit taking early on that was offset by the announcement of a change in Standard & Poor's outlook for Pakistan, from stable to positive, which helped the market breach 4300. However, Wednesday brought with it a fall in the index on the back of high badla rates. The fall though was offset later on in the day as investors began to re-enter the market at the lower levels. Thursday brought the lowest volumes of the week, which aided in the fall of the index after a positive opening. Once again, the fall was offset later on in the day on the announcement of the Indian Prime Minister's decision to attend the SAARC summit in Islamabad in January.

High badla rates however, limited the index's recovery. Friday brought relatively higher volumes however, the index fell in face of the rumors of another delay in PSO's privatization and continued high badla rates. It must also be noted here, that even though volumes were strong, they exclude OGDCL's provisional trading volume figures, which remained strong throughout the week.


Next week, volumes are expected to remain strong. Furthermore, the excess cash received for OGDCL shares is also expected to be returned during the week, which should boost both volumes and the index as investors try to allocate these excess balances. This positivity will be supported by the continuous warming in Indo-Pak relations. However, the unresolved LFO issue and the MMA's decision to begin nationwide agitation may offset this optimism.


The major developments this week were:

•Petroleum prices were increased by an average of 2.6% in the recently held meeting of the Oil Companies Advisory Committee. Prices of Kerosene, High Speed Diesel and Motor Gasoline were raised by 3.21%, 3.11% and 1.85% respectively.

•Given the huge differential between surcharges on gas and petroleum products, the World Bank has proposed an increase in gas surcharges to the Government of Pakistan. The government collected PkR15bn and PkR45bn from gas and petroleum surcharges respectively.

•As per the Minister of Petroleum and Natural Resources, oil and gas exploration attracted investments of close to US$1bn during FY03, almost 40% higher than last year.

•The Managing Director of PSO in a recent interview stated that work on the second white oil pipeline would commence from next year.

•Commerce Minister Humayun Akhtar stated that Pakistan and the EU are close to reaching a deal on the bed linen issue.

•Pakistan and India signed an agreement on Monday to resume flights between the two countries by Jan. 1, 2004.

•Formal notification was received with regards to the financial charges payable by PSO to oil refineries. The Economic Co-ordination Committee in its meeting held last month waived off PkR8bn owed to the oil refineries. Financial charges of approximately PkR9bn on the outstanding amount arose as a result of the energy sector's circular debt problem as per PSO. The government and PSO had earlier indicated that this issue would be resolved and that the interest charges would be waived off, however, formal notification in this regard was awaited by the bidders.


The State Bank carried out the last auction of the jumbo bond series, which helped it nearly achieve its original target of collecting PkR50bn. The Bank accepted bids for PkR8bn worth of 10year bonds, PkR3.6bn worth of 5-year bonds and PkR2bn worth of 3-year bonds. The PkR16.45bn injection made by the State Bank earlier in the week helped it achieve its auction target without significantly altering the yields on the bonds. The yields for the 3 and 5-year bonds were marginally reduced, while that on the 10-year bond was left unchanged. Liquidity in the system is likely to remain tight during the current month due to several reasons, including demand from the banks to improve their balance sheets before reporting annual results. Given that the State Bank intends to continue with the current interest rate structure in the foreseeable future, it is likely to inject more money into the system during the coming weeks.

The third auction of the Jumbo PIB issue carried out by the State Bank helped it nearly achieve its original auction target of PkR50bn. It accepted bids for PkR8bn worth of 10-year bonds, PkR3.6bn worth of 5-year bonds and PkR2bn worth of 3-year bonds. Thus, the total bids accepted in the series of auctions fell just around PkR2bn short of the PkR50bn target. Moreover, Thursday's PkR16.45bn injection in the market by the SBP helped it achieve its auction target without significantly altering the yields on the bonds.

The cut-off yield on the 10-year PIB was left at the same level as the last auction, i.e. 6.23%. However, yields on the 3 and 5-year bonds declined marginally from 4.09% to 3.95% and from 5.12% to 5.00% respectively.

By allowing yields on 3 and 5-year bonds to fall, while simultaneously maintaining it on 10-year bond, the SBP made it more attractive to hold the longer term bond and further rationalized interest rates structure in the process. Table 1 details the sizes of the bids accepted as well the cut-off yields for all three bonds in during the auction series.




The State Bank has reiterated several times that it does not plan to significantly alter the current interest rate structure in the foreseeable future. This was further qualified by its action of injecting adequate liquidity into the market before carrying out the third auction. As a result, it would be safe to assume that the next monetary policy statement, which is expected to be released next month, will be very similar to the first one. Keeping this in view, the SBP is likely to make further significant injections in the economy during this month since the follow-on effects of withdrawals from banks for eid holidays/shopping, combined with payment of dividend by PTCL and blockage of money in the OGDCL IPO process, are likely to keep liquidity under pressure. Moreover, banks report their annual financial position in the month of December and will look to streamline their balance sheets.


Shortage in available liquidity is likely to keep overnight lending rates on the higher side during the month. We expect this scenario to play even with injections from the SBP. Since changes in badla rates are closely linked to variations in the overnight rate, the former is likely to remain on the higher side as well. Moreover, in order to satisfy their liquidity needs, banks are likely to curtail their participation in the stock market during the month.






Mkt. Cap (US $ bn)




Avg. Dly T/O (mn. shares)




Avg. Dly T/O (US$ mn.)




No. of Trading Sessions




KSE 100 Index




KSE ALL Share Index