Updated July 17, 2004


The bonus speculation in PSO proved to be a trigger for the market with the index inching up by 0.59% on the very first trading day of the week. The rally proved short lived as inflation data disturbed the debt market significantly on Tuesday. Bonds yields thus went up leaving stock market in uncertainty. Wednesday was a positive day, with positive news flow from the oil and gas sector pushing the index up by 0.02%. The SBP's circular regarding IAS 39 implementation on PIBs jolted





the market on Thursday. Banks were the losers while retail investors also en-cashed some of their holdings to raise cash for the PPL subscription. Friday was the weakest day of the week with the index coming down nearly 1% to 5,387.84. The key concern was the debt market where the yields went up further in panic selling from the banks.


Though the overnight market is quite liquid, badla rates may go up slightly owing to rising PIB yields. We expect most companies to come up with the dates for their June 30th result announcements, which is likely to trigger some activity in respective stocks. We also expect trading activity to improve in the provisional trading of PPL shares as most of the subscribers are unlikely to get their desired quantities owing to the relatively small issue size. We maintain our earlier view that market will stay range bound with a trading range of 52505500.


The major developments this week were:

•In a recently held meeting, the Secretary Ministry of Petroleum & Natural Resources has asked gas companies to complete their expansion projects ahead of schedule.

•WAPDA is reportedly facing a shortage of 1000MW currently, and estimates are that the demand supply gap is likely to rise to 5000MW by FY06.

•A sharp fall witnessed in US cotton prices during recent weeks has led to new concerns for the local textile and cotton sectors.

•Reportedly, car sales shot up by 57% during FY04 to 96,674 units from the 67,955 units that was reported last year on the back of the growth in car financing and increased production capacity in the industry.

•The State Bank mopped up PkR51.5bn by selling one-week T-bills through an OMO on Monday.

•As per the Federal Bureau of Statistics, CPI inflation reached 4.57% on an annualized basis during FY04, versus the 3.1% that was recorded during FY03 and versus the SBP's revised target of 3.9-4.2%. ???CBR issued a clarification with regards to its announced decision on Monday to set the cumulative taxes and duties on imported cars in fixed dollar terms rather than as a percentage of the vehicle's value. ???Pakistan and India announced peace talk schedule on Tuesday.

•Telenor has announced plans to invest US$5bn over the next 5 years to establish its franchise in Pakistan.

•The Ministry of Petroleum and Natural Resources has invited bids for exploration rights of 5 blocks in offshore Indus in Sindh.

•Domestic LPG prices have gone up by 13-16% over the last month.

•PSO has received offers from Fal Oil, Hascombe and Petro Plus for HSFO import.

•The Water and Power Development Authority has announced that it will be extending the incentive package for industrial consumers till 31 Dec 2004.

•Pakistan has received the Best Sovereign Borrower award from Euromoney in the magazine's June edition.

•As per a source in the Ministry of Industries, the auto sector may be included in Pakistan's SAFTA sensitive list, which is to be exchanged with other SAARC countries during the fourth meeting of the committee of experts that is to be held in Bhutan from July 21.

•The Ministry of Petroleum and Natural Resources announced on Thursday that Orient Petroleum Inc. has discovered oil and gas reserves in Mirpurkhas Block in Sindh.

•Reportedly, Pakistan received US$3.823bn in net remittances during FY04.

•NIT, Pakistan's largest open-ended fund has been given permission by the relevant authorities in Islamabad to market NIT units in the Middle East.

•The appointment of a Pakistani as UN representative in Iraq was the first step and the government may consider the Iraqi government's request for troops.


While machinery imports have been blamed almost entirely for Pakistan's worsening trade deficit, we feel that there is a bit more to the story. Our analysis indicates that while machinery imports contributed significantly to import growth, non-machinery imports also grew significantly during the year. In our opinion, in the future we expect machinery imports to pick up further pace owing to industrial expansions, BMRs and the telecom sector de-regulation, while non-machinery imports are also likely to show significant increase as more imports are demanded to satisfy Pakistan's growing economy. We thus expect the rupee to depreciate in the near future.

A lot has been said about Pakistan's rising trade deficit, which hit US$3.2bn in FY04. This rise in the trade deficit has been blamed almost entirely on the rise in machinery imports.


As is evident, imports have been growing strongly over the past two years after remaining stable for a number of years.

While the general assumption has been that the growth in imports has come about as a result of the growth in the import of machinery, as is evident from the graph below, this is not entirely true, since non-machinery imports have also shown substantial growth over the same period. It may be noted here that machinery imports made up only 26% of total imports last year.


In order to investigate the strength of Pakistan's trade balance, we calculated an adjusted trade balance. This has been done, since machinery imports are assumed to add to a country's production potential, while other imports are assumed to be for consumption purposes. Interestingly, we find that Pakistan's trade balance of US$3.2bn for FY04, after adjustments for machinery imports, becomes a trade surplus of US$900mn.




Our analysis thus shows that Pakistan's trade balance has become strongly negative because of the high machinery import growth, during the current fiscal year. We expect machinery imports to continue growing as most of the Pakistani industrial sector is in the process of either expanding its capacity or is trying to undergo a BMR. The ongoing de-regulation in the telecom sector will also increase the pace of machinery imports in next 2 years. At the same time, we expect non-machinery imports to continue growing strongly as more imports are demanded to satisfy Pakistan's growing economy. We thus expect pressure to continue building on the rupee and see some depreciation in the near future.



Over the last two months, the rupee has been showing a continuous weakening against the US dollar. The causative factors behind this development are mostly fundamental in nature. It is a fact that returns are being normalized in almost all the investment market segments in recent times. All these developments are pushing the liquidity holders to find the dollar haven, as the recent changes in the macro economic indicators are supportive of this as well. Thus the risk of dollarization is very genuine at this juncture. There are two types of impacts on the stock market from the weaker rupee and the resulting dollarization. The first is related to the overall impact on the cash liquidity available to the market and the second is the impact on the business models of the stocks. We will confine today's analysis to the first one while we will cover the second aspect in tomorrow's daily. We do NOT expect the slow move towards dollarization to have any significantly negative impact on the liquidity available to the stock market. We maintain our earlier stance that market will keep hovering between the 5300 - 5500 level.


We are presenting the sectoral impacts. On a net basis, we believe that all the index heavyweight sectors are likely to get benefit from a weaker rupee. Our top picks in a weaker rupee scenario are Pakistan Telecom and Pakistan Oilfield. Hubco is another stock, which will get positive impact from a strong dollar.

FY04 INFLATION = 4.57%

The FBS released its FY04 inflation figures, wherein it reported a 4.57% rise in inflation. This inflation rate was boosted primarily by high food prices during the year on the back of wheat hoarding. At the same time, core inflation grew by a relatively slow 3.7%, leading us to believe that the SBP will not hasten its gradual rise in rates to combat inflation.


Fears of a supply disruption have been cited as the major reason behind the surge in oil prices during the last fortnight. The government's hope of raising the Petroleum Development Levy (PDL) to normal levels could not materialize as once again the government absorbed the increase in oil prices against the PDL. According to reports, the government has adjusted the PDL on all the products in an effort to mitigate the impact of rising oil prices on end consumers. However, the government might find itself in a tight spot if oil prices continue to hold at these levels for a long time. There seems to be no let up in oil prices and despite increased supply from OPEC, oil prices have not fallen by much. OPEC is scheduled to meet in the first week of August to discuss the possibility of a further increase in oil supply, up to 500,000 barrels per day. The problem however remains that OPEC's spare capacity is now limited. Among the OPEC-10, Saudi Arabia is the only country that seems to have spare production available, which is currently estimated at 1.1mn barrels per day.








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