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US Dollar 59.9 60
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Last updated: Friday 23 Dec, 2005-12.30 P.M (PST)

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3 DAYS FORECAST
In oC

CITIES MIN MAX

HUM%

FOR.

KARACHI
Today 12 26 38 Sunny
Tomorrow 11 27 38 Sunny
Day after 11 28 38 Sunny
LAHORE
Today 1 20 87 Sunny
Tomorrow 2 20 87 Sunny
Day after 2 21 87 Sunny
ISLAMABAD
Today 0 18 59 Sunny
Tomorrow 0 18 59 Sunny
Day after 0 21 59 Sunny
HUM%: Humidity In %
FOR.: Weather Forecast
updated: Fri - Sun 23-25 Dec, 2005

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KARACHI         - 021 LAHORE          - 042 ISLAMABAD    - 051 FAISALABAD   - 041 MULTAN          - 061 PESHAWAR    - 0521 CANADA          - 1 KUWAIT           - 965 INDIA               - 91 IRAN                - 98 U.K                   - 44 U.A.E                - 971 U.S.A                - 1

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 PAKISTAN WEEKLY REVIEW

AlFalah Securities (Pvt) Ltd.
Monday, Nov 07, 2005-Friday, Nov 11, 2005

 

BOARD MEETINGS

COMPANY

DATE

DAY

TO CONSIDER

United Bank Limited

12-11-2005

Saturday

Accounts for the quarter ended September 30, 2005.

Siemens Pakistan Engineering Co. Ltd

21-11-2005

Monday

Financial Statement for the period ended September 30, 2005.

BOC Pakistan Limited

25-11-2005

Friday

Annual Accounts for the period ended September 30, 2005.

MARKET FOCUS

TSUNAMI OF CEMENT PRICES

Cement demand is likely to raise domestically as well as regionally owing to expected higher construction activities. There is considerable demand for cement existing from the regional countries especially from UAE, Iraq, Afghanistan, Sri Lanka and Jordan. This is indeed a good opportunity for the country to earn valuable foreign exchange. We are of the opinion that prospects of cement companies are bright especially for those companies whose expanded capacities are coming online in the near future. It would enable them to operate their respective plants at full capacity and benefit them from the prevailing demand supply scenario. In line with the aforementioned factors, we maintain a positive stance on the cement sector across the board.

The issue of exorbitant cement prices in the domestic market is getting over heated as number of stakeholders are coming up with different opinions and highlighting diversified measures to resolve the so-called crisis like situation. In the first place, major affectee of the recent price hike is construction industry that comprises of housing, commercial and industrial development. Although, some of the cement manufacturers have raised the prices by 20%-25%, the main havoc is created by distributors and retailers who are presumably making extra money due to unprecedented high demand of the commodity both from domestic and foreign consumers.

The demand of the commodity is high primarily due to 'June Effect', where public sector funds are to be utilized before the end of ongoing fiscal, resulting in spikes in demand. This demand growth pattern is likely to end once there is sufficient supply available in the market. Moreover, consumers curtailed their cement purchases on the hopes of probable reduction in CED in FY06 budget, which did not materialize. Hence, this scenario has given an opportunity to cement dealers and retailers to make heaven out of this surge in demand where cement dispatches are currently hovering around 55 ktpd as a result of 100% capacity utilization by cement producers. The supply side has already tested its potential and cement companies have reportedly provisioned additional supplies from their inventories. Some quarters have urged the government to import cement from regional countries to meet the burgeoning demand. It seems a good omen for the local cement manufacturers in the scenario where regional countries are also short of cement and Pakistani cement producers are taking hefty cement orders to fulfill their local demand.

Cement exports stood at 1.45mn tons during July-May 05 which was 10% of the total production. Currently manufacturers are exporting 175,000 tons per month that has created shortage due to which prices were revised upwards. Due to extra ordinary surge in demand cement manufacturers have increased prices without any justification therefore the Monopoly Control Authority (MCA) plans to take severe measures against this unwarranted price hike by imposing penalty of PkR10mn after the formal approval of the cabinet and parliament. However show-cause notices have been issued to the manufacturers to bring down their prices with in a week. As investments in cement sector are underway we think that imposition of penalty could seriously hamper growth and investment.

ECON FOCUS

FISCAL AND MONETARY POLICY IMPASSE:

Fiscal and monetary policies are pulling the economy in opposite directions.

On the one hand, the SBP is pursing a tight monetary policy to rid the economy of potentially crippling double-digit inflation. However, the government is not complementing monetary discipline with fiscal austerity.

Evidence of this is that a fall in private sector credit off-take in the first quarter of this fiscal year has been totally compensated by more then budgeted government borrowing.

From a loose monetary policy to an expansionary fiscal policy

"Excessive government spending causes inflation."

Arthur Burns, former Fed chief and one time mentor of Alan Greenspan, used to begin teaching his students with the question, "What causes inflation?"

His one line answer was, "Excessive government spending causes inflation."

Both Greenspan and Burns concur that to tackle the menace of inflation, fiscal discipline is as, if not more important, then monetary policy. From this, there are important lessons to be learned by us.

WE HAVE AN INFLATION PROBLEM, NOT A GROWTH PROBLEM!!

Inflation and economic growth are parallel concepts. We are all aware of the trade-off that exists between economic growth and inflation. However, one thing should be clear. Pakistan today is confronted with a high inflation problem, not a growth problem. Even a growth rate of 5.5-6% is acceptable as long as inflation is curbed. The sooner we prioritize in this way, the quicker we can understand that tackling inflation is priority number one at this stage.

Unresolved inflation problem = Stagflation = Unemployment becomes priority number 1

However, if we continue to believe that tackling inflation whole-heartedly would compromise economic growth, the frightening prospect of stagflation a few years from now is not entirely impossible. Once the economy slides into a recession, then, regardless of the level of inflation, the government has to provide fiscal stimulus to the economy.

LESSONS FROM HISTORY...

We should learn our lessons from history. Relatively high levels of inflation (5-6%) were witnessed in the early Nixon years. However, due attention was not given to correct imbalances in fiscal and monetary policies. By the mid 1970's, the United States was gripped by the phenomenon of stagflation, with inflation in double-digits and unemployment nearing 9%. Gradual recovery was then achieved at the expense of tax rebates and massive government spending, meanwhile incurring huge fiscal deficits. Once stagflation sets in, inflation can no longer be priority number one. Unemployment is.

FISCAL AUSTERITY IS THE ORDER OF THE DAY:

It would therefore be prudent on the government's path to adopt a more conservative approach in its fiscal policy. A fiscal deficit in excess of 4% when inflation is hovering at 9% is a recipe for disaster. The government needs to improve tax collection and reduce government spending on a priority basis. But with the South-Asian disaster and its subsequent reconstruction cost breathing down the Government's neck the only hope is manna from heaven. Or is Hades already chuckling?

MARKET THIS WEEK

With just four sessions this week, bulls continued to dominate the KSE. The index closed up 357 points or 4.2% wow at 8793 level. Average volume traded over the week increased by 46% to 453mn shares compared to 243mn traded last week.

Bulls took the market by storm on Monday as the market surged up 225 points. Banks once again performed well on the news of raising paid-up captial to Rs 3bn by the end of 2006 by SBP, triggering PICB, ACBL and FABL to close on their upper circuit levels. Cement sector was also the major performer on the news of expansions coming online by the end of December 2005 and hence DGKC, FCCL, MLCF and PCCL all closed on their upper circuit levels. PTC and OGDC provided the main support, both closing up PkR 2.10 and PkR 4.20 respectively. PTC gain was contributed by the news of possible outcome of meeting between PC and Etisalat and OGDC's rally was led by the news of Adhi Field going on stream which is a joint operator along with PPL.

On Tuesday, index swung both ways as the market gained 0.3% or 27 points. PTC, the volume leader, gained 2.2% at PkR 61.60 on the back of rumors of some positive outcome from the PC-Etisalat meeting. Cement sector was the out performer with DGKC, LUCK and MLCF closing up 1.6%, 1.9% and 1.3% respectively. PSO closed up 1.1% at PkR 419.75 on the back of its privatization rumors.

There was no trading session on Wednesday on account of Iqbal Day.

With no news from Privatization Commission on the sale of PTCL, market remained range bound on Friday, losing a point at close. DGKC was the volume leader, gaining 4% at close. PTCL lost 0.4% as investors were expecting some positive development from the privatization front. As international crude oil prices declined, PSO and POL followed, closing down 1.6% and 1% respectively.

OUTLOOK

Market stands at a crucial point where one is expected to trade with caution. Technically, major resistance is expected around the 9000 level. But once the market has consolidated above this level, we are in for a major upward rally. If PTCL deal remains intact, market is expected to respond positively and create room for other privatizations to follow soon. Our picks for next week are PTC, FABL, PICIC and FFC.

Pakistan Economics Snapshot

WEEKLY

W-3

W-2

W-1

W

 

Forex Reserves (USD mn)

12,419

12,447

12,406

12,627

EXCH RATE:

EXCH RATE: PKR/USD

59.70

59.78

59.760

60.760

PkR/Euro

72.98

72.47

73.39

72.34

MONTHLY

APR-05

MAY-05

JUN-05

JUL-05

INTEREST RATES

3m T-bill

7.2%

7.60%

7.48%

7.69%

6m T-bill

7.8%

7.95%

7.94%

7.97%

12m T-bill

8.3%

8.45%

8.40%

8.69%

INFLATION

CPI (YoY)

11.1%

9.8%

8.74%

8.99%

MONEY

Currency in Circulation (YoY)

15.1%

Na

Na

Na

Deposits (PkR bn)

2290

2320

2355

Na

(YoY)

20.49%

19.4%

18.2%

Na

Loans (PkR bn)

1720

1752

1759

Na

(YoY)

37.5%

36.7%

32.8%

Na

M2 (YoY)

14.1%

Na

Na

Na

EXTERNAL BALANCE

Exports (USD mn)

1301

1384

1541

1272

(YoY)

Na

Na

23.4%

-17.4%

Imports (USD mn)

1903

2033

2241

1996

YoY

Na

Na

20%

-10.9%

Trade Balance (USD mn)

-601.5

-648.7

-699.5

-724

YEARLY

2001

2002

2003

2004

2005

GDP (USD bn)

58.51

63.50

67.70

69.07

75.29

GDP growth

1.84%

3.10%

5.11%

6.40%

8.4%

Agricultural Growth

-2.2%

0.1%

4.1%

2.6%

7.6%

Services Growth

4.76%

5.30%

5.24%

5.49%

7.9%

Manufacturing Growth

9.3%

4.5%

6.9%

13.4%

12.5%

Population (mn)

143

146

148

149

152.5

GDP per capita (USD)

408.6

433.9

457.4

463.6

503

TRADE BALANCE

Imports (USD bn)

10.202

9.434

11.333

15.47

20.6

YoY

6.2%

-7.5%

20.1%

36.5%

32%

Exports (USD bn)

8.933

9.14

10.889

12.27

14.4

YoY

9.1%

2.3%

19.1%

12.7%

17.1%

Trade Balance (USD bn)

-1.269

-0.294

-0.444

-3.2

-6.2

Current Account (USD bn)

-0.513

1.33

3.16

1.73

-1.9

Remittances (USD mn)

1087

2389

4236.85

3800

4168

 
 

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