Tuesday saw some growth, however volumes remained
low, whilst rumors regarding exposure problems being faced by a broker
forced the index downwards. Later on during the session however, PSO's
privatization related rumors surfaced along with news regarding KESC's
privatization, which pushed the index into positive territory.
Wednesday brought the index down as MMA's deadline on the LFO issue
approached and investors looked to book profits. This carried on into
Thursday as investors remained jittery with regards to MMA's protest
action, which however was offset by institutional buying. Friday's
session received strong positive support from rumors of an agreement
between the MMA and the government regarding LFO and the President's
uniform and from the President's statement regarding Kashmir.
OUTLOOK FOR THE FUTURE
Any further news on the MMA-govt and Pak-India
front will probably have an immediate impact on market sentiment as we
have seen over the past week. Furthermore, as we approach the end of
the year we may see volumes remaining low as institutions prepare
their period-end financial statements. Lastly, any news regarding the
privatization of SSGC and HBL should also provide the market with some
The major developments this week were:
•Pakistan's current account surplus during
July-October dropped 11% YoY to $1.4bn due to the decline in workers
remittances to $1.2bn as compared to $1.4bn that were received during
the same period last year and the jump in overseas travelers
requirements to $244mn from $18mn that was spent last year.
Additionally, Pakistan's capital account witnessed a worsening deficit
to $682mn from the $163mn recorded during July-October last year. This
was due to a fall in foreign investment to $88mn (2002: $242mn), a
fall in direct foreign investment to $170mn (2002: $402mmn) and a fall
in foreign loan disbursements to $374mn (2002: $641mn).
•The government is expected to introduce 15 and
20-year bonds next month to serve as a benchmark for house financing
and construction loans. This led to a sharp rise of 30 to 40 basis
points in the yields of existing PIBs during the last week.
•The government has decided to issue bonds worth
PkR14bn to cover HBL's non-performing loans in an attempt to speed up
the privatization process. It has also announced that the second
pre-bid meeting will be held in two weeks time.
•The management of PTCL is considering offering a
Voluntary Separation Scheme to about 25% of its staff.
•Reportedly, the Privatization Commission has
received 5 Expressions of Interest for KESC in response to its
recently advertised invitation. However, four of these five parties
have actually submitted statement of Qualifications. These parties
include: i) A consortium led by Hassan Associates; ii) Independent
Power Corporation PLC and Eskom of South Africa; iii) Corner Stone
Partners; and, iv) Kanooz Al Watan & Siemens.
•According to OCAC press release, petrol prices
for the next fortnight will be about 28-30 paisas higher. However,
there was a marginal downward adjustment in the HSD prices.
•WAPDA has announced that it will work on
improving its payment schedule to the IPPs who have been struggling
for timely payment of their dues even after the resolution of their
issues with the state run utility.
•The visiting IMF review mission concluded its
weeklong visit with a final meeting with Finance Minister, Shaukat
Aziz, during which it was agreed that Pakistan could beat the 5.3% GDP
growth target for FY04.
•Remittances sent by overseas Pakistanis during
the first five months of the current fiscal year (Jul-Nov) declined by
16.6% YoY to $1.49bn. During the same period last year, $1.79bn was
received, which resulted in a year-end total of $4.2bn. The target for
FY04 was set at $3.6bn (14% YoY lower).
•Money Supply (M2) grew 8.06% during July-Nov 03
against a target of 11.06% for the year as a result of the growth in
Net Domestic Assets by PkR108bn versus a year-end target of PkR100bn.
The main reason for this growth was the PkR124bn in credit extending
by banks to the private sector against a full year target of PkR85bn
as a result of the low interest rates. This growth has resulted in a
2.6% rise in consumer inflation during the first five months of the
fiscal year against a target of 4% for the year.
•Unilever Pakistan on Thursday announced its
intentions to sell Dalda, its edible oils business, as part of the
parent company's global strategy. As per reports, the company is
considering either an outright sale or a joint venture. Rumors suggest
that parties interested in acquiring Dalda include the Lakson group
and Habib Oil.
•Minister of Industries, Liaqat Jatoi while
speaking to the press commented on the difficulty of taking action
against cartels in the large scale manufacturing sector because of
their huge contributions in terms of tax revenues and jobs. He also
said that he had received a formally signed copy of the auto Task
Force's report on December 15.
•The Private Power Infrastructure Board has given
its approval to setting up of four power projects in the country. The
proposed power projects are likely to add around 770MW to the
installed electricity generation capacity of the country at a cost of
approximately US$838mn. Out of the four power plants, three are
thermal plants based on gas, while one is based on hydropower.
•Foreign Direct Investment in Pakistan during the
July-November registered a fall of 53% YoY to $217mn. Total FDI
received last year was $798mn, which was primarily high on the back of
proceeds received against the privatization of United Bank Limited.
•The Corporate and Industrial Restructuring
Corporation (CIRC) managed to settle non-performing loans worth
PkR3.5bn for Habib Bank Ltd. during the last three months. Since
potential bidders for HBL have expressed concern over the bank's large
portfolio of non-performing loans, the CIRC has been awarded the
responsibility of settling PkR8.0bn worth of these loans.
•Pakistan's total liquid foreign reserves fell by
$8mn during the week ended December 13, to $11.861bn from $11.875bn.
The primary reason for the fall in reserves was the $176mn payment on
the outstanding Eurobond that is to mature in 2005.
A justification for immediate change in interest
Advocates for an immediate increase in interest
rates have repeatedly pointed towards inflation as a justification for
their arguments. This article attempts to evaluate this argument by
comparing the current year's inflation rate with last year's inflation
rate, as well as the government's full year target of 4.0%. The
analysis shows that while inflation has shown a rising trend during
the past few months, the inflation rate for the first five months of
the current fiscal year is at a lower level than that for the
corresponding period last year. Thus, it appears that the target
inflation level can be achieved without any drastic move by the State
Bank. Moreover, the need for maintaining a balance between promoting
further economic growth and curtailing inflation is likely to keep the
SBP from raising interest rates within the next one or two months.
The yields on 3, 5 and 10-year Pakistan Investment
Bonds witnessed a sharp rise during the previous week, fueling
speculation about a possible hike in the interest rates in the near
future. Furthermore, local newspapers have cited various experts who
claim that, given rising inflation, the current interest rate
structure is not sustainable and that the State Bank will be forced to
revise its policy as early as January next year. This article attempts
to analyze some of these arguments to evaluate whether or not the
State Bank can continue with its current policy, at least in the short
OVERVIEW OF THE MACRO SITUATION
The local economy has rarely, if ever, seen a
combination of as many positive influences as it is currently
witnessing — capital inflow reached unprecedented level during the
past few years, the Government paid off more loans than it borrowed,
leading to net debt retirement last fiscal year and even the IMF
recently expressed the opinion that current year's GDP growth target
of 5.3% could be surpassed. All these factors, combined with a number
of other developments, has led the State Bank to reduce interest rates
to their lowest level ever. Given that capital inflow, which is widely
regarded as the key catalyst for the economic upswing, is reverting to
a slower, more normalized level, there is a general consensus that the
SBP will raise interest rates during the second half of the current
fiscal year. However, there is a stark difference of opinion among the
experts over how soon this change is likely to occur.
THE CASE FOR A CHANGE IN INTEREST RATES IN THE SHORT TERM
Experts advocating an immediate change in interest
rates often refer to the level of inflation as strongest justification
for their argument. Inflation in November-03 over the corresponding
month of the previous year was 4.22% as opposed to 3.11% last year.
Moreover, this number stood at 3.51% in October '03, as compared to
3.49% in October '02. These figures indicate a rising trend in
inflation, pointing to a need to tighten the monetary policy,
especially considering the Government's target inflation of 4% for
Most consumer finance products were introduced in
the current calendar year and have been identified as a key cause for
rising inflation. Given that these financing options are likely to
gain more popularity and acceptance in the coming months, the upward
pressure on inflation is likely to increase. Moreover, the general
view holds that the rise in disbursement of private credit by banks
has been directed towards such products rather than manufacturing.
This implies that prices are likely to rise without a corresponding
rise in production unless the interest rate structure is adjusted.
As mentioned above, rising inflation is the most
important argument presented for demanding an immediate rise in
interest rates. While it is true that inflation is currently at a
higher level YoY as compared to the Government's full year target,
Table 2 shows that inflation during July-November over the
corresponding period year stood at 2.62% compared to 3.59% last year.
Given that this period includes data for Ramazan, it is likely that
the Government will be able to reach its inflation target without a
drastic change in its policy. The argument for controlling rapid
spread of consumer financing that does not add to the production
capacity of the country is justifiable. However, the SBP needs to
ensure that any such move does not curtail any development that is
already taking place in the manufacturing sector. Moreover, despite an
improvement in most macro variables, the current economic growth has
not yet translated into greater employment opportunities. If the SBP
moves too fast in raising the interest rates, its actions might
curtail the trickle down effect of this growth.
While we agree that the analysis above is by no
means comprehensive, it demonstrates that the threat of inflation
alone does not justify a sudden change in the interest rate levels.
Some people have argued that low interest rates have forced banks to
look towards alternative avenues, such as the stock market, to
maintain profitability and rising interest rates would prompt them to
focus more on their normal operations. Again, while this argument
holds some truth, the introduction of consumer finance and the current
cotton crisis has presented banks with an opportunity to make money
through lending activities rather than investments. This mitigates the
need for any sudden change in interest rates by the SBP. Consequently,
we feel that while the State Bank is likely to raise interest rates in
the second half of the current fiscal year, we expect this change is
likely to occur in the latter half of the next quarter, or even in the
fourth quarter, rather than as early as January.
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