It's a wild world at the KSE these days, where
during the last two weeks have seen completely contrasting behaviour.
The KSE-100 Index eroded by 11.4% (833 points) during the week
ending 27th May, gained 11.5% (746 points) during the week ended 3rd
June. The badla market saw its last full week of financing before
the final phase-out plan beginning from 8th June, with an 8.25%
reduction in weekly badla volume. Badla statistics remained
relatively sedate with no major fluctuations during the course of
The weighted average badla rate at KSE stood at
11.4%, which represented a slight increase of 60bps versus the
weighted average badla rate of 10.8% seen on the previous Friday.
Badla rates did not fluctuate that wildly during the week, and in
fact saw a slow and steady increase. A highly liquid interbank money
market seems to have allowed potential badla financiers room to
finance leveraged positions with relative ease.
The weighted average badla rate at LSE also
depicted a slow and gradual rising trend during the week. Badla
investment at KSE rose to Rs21.5 billion compared to Rs20.4 billion.
This increase was brought about by rising equity prices. Badla
volume, on the other hand, remained relatively stagnant on a
weekend. Badla investment at the LSE also witnessed a rising trend
in line with rising equity prices.
The COT phase-out plan provided by the KSE
management will begin from next week. Total badla volume will have
to be reduced by 8.25% on a weekly basis. This is likely to exert
some pressure on prices, as the shift to margin financing and stock
futures isn't likely to be an easy one for investors. Investors are
likely to take cue from the 2005-06 budget and the announcement
regarding CVT will have a bearing on the market.
The Federal Budget 2005-06 is to be announced on
the 6th June and expectations of an increase in the capital value
tax (CVT) are amplifying with each passing day. The requirement to
increase the tax net on the services sector along with documentation
of the capital markets would propel the Central Board of Revenue (CBR)
to push for an increase in the CVT.
Last year, the market participants and investors
had cumulatively lobbied the government to reduce the tax rate to a
minimal 0.01%. However, till the time the issue of CVT persisted,
the market remained static like a dead horse. An increase in the CVT
from 0.01% to 0.01% is very much on the cards. The government may
even go ahead with taxing trading income with the objective of
curbing excessive day trading. The CVT certainly has the potential
of delivering a mighty blow to the already weak and capitulated
market. The CBR is considering reducing the tax on petroleum
development levy and widening the tax base to cover the services
sector. Already the tax collection in the economy is abysmally low.
Tax as a percentage of GDP in Pakistan is around
14%, while in the region most developing countries like India,
Malaysia, Korea and Indonesia have tax revenue more than 20% of GDP.
In the search for alternative sources of tax
revenue, the government is likely to impose taxes on the capital
market and real estate. Furthermore, the government would also be
aiming to improve the documentation of the capital market by brining
it in the tax net. Another objective of the government, which may
make CVT more attractive to them, is to curb excessive day trading.
Currently, Karachi Stock Exchange is one of the
most volatile markets of the world. The SECP might recommend a
deepening in CVT to the government with the objective of pulling in
reins on the volatility.
The market seems to dislike any move towards
documentation. An example of the market behavior was evident, when a
notice for client information by the SECP, send the market into
panic. Similarly, last year, when the government initially announced
the imposition of CVT, the market remained in the doldrums for long,
until finally the government reduced the CVT to a minimal 0.01%.
And finally, the government has decided to
postpone bidding for PTCL scheduled for 10th June. The
uncompromising attitude adopted by both the government and the
employee unions has turned for the worse. Employees were vehemently
opposing privatization of PTCL. They were disgruntled with the
situation relating to what they referred to as cronyism in
promotions. They had no doubt over the government's seriousness
about the issue, but believed that the new management would not
succeed in running the company without giving the employees
guarantees over job security and experience-based promotions.
Employee Union leaders dropped all their demands
with regard to bonuses and salary increases and urged stoppage of
the privatization process. The management wanted privatization to go
through but was skeptical over the actual success of the whole
process. It was in a conundrum of being in the firing line between
the government higher-ups and the employees. The Privatization
Commission seemed the most helpless body. The front-runners in the
process (Singtel, Etisalat and Telekom Malaysia), as expected, were
tight-lipped. They were keeping a close eye on the developments.
The bidding has been postponed and the next
question is, will it happen and what will be the response of
strategic investors. It is feared that it may also turn out to be a