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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, Dec 05, 2005-Friday, Dec 09, 2005

 

BOARD MEETINGS

COMPANY

DATE

DAY

TO CONSIDER

Nestle Milpak Limited

09-12-05

Friday

To review the third quarter accounts for the third quarter ended September 30, 2005 and consider the proposal of interim dividend.

Husein Sugar Mills Ltd.

09-12-05

Friday

Annual Accounts for the period ended September 30, 2005.

JDW Sugar Mills Limited

09-12-05

Friday

Annual Accounts for the year ended September 30, 2005.

Prime Commercial Bank

13-12-05 & 14-12-05

Tue & Wed

The strategic plans / policies of the bank.

Polyron Limited

15-12-05

Thursday

The creation of first charge on the borrowings from the associate company and to review the latest financial position of the company.

MARKET FOCUS

UP, UP, AND AWAY!

In the local market with both rising international as well as local oil prices, the gold prices touched a high of PKR 10085/10 grams. The return on investing in gold for the period 26th August 2005 to 7th December 2005 has been a healthy 19.5%.

As of late, with WTI crude oil at $60 and international gold prices at $515/oz, we see the international Gold Oil Ratio (GOR) at 8.6, slowly crawling up to the historical band and up from our last GOR update of 7.23. The local GOR has stayed at a level of 260 on average from January 1997 to date. Over the months of August and September the local GOR (based on Saudi light crude oil prices per barrel and local gold prices per 10 grams) were 140 and at current levels the GOR is at 202 which shows a gradual upward trend from our last GOR update of 157 showing a trend towards the 260 level. With Saudi light Crude oil prices expected to remain stable, we expect local gold prices to increase even further.

ALL THAT GLITTERS IS GOLD:

The weekly published on the 26th of August 2005 claimed that oil and gold prices moved in a lagged synchronization. Our contention was that historically the Gold oil Ratio (GOR) has been within the range of 14:1 - 16:1 and at present prices of both oil and gold, this range has fallen to 8.6:1. Therefore as price of oil do not seem to be tapering off, to maintain the same historical ratio gold prices would increase. Since the 26th of August 2005, local prices have increased approximately 20%, which if annualized is a annual return of 60%.

INTUITION:

The intuition behind the high correlation between these two commodities is that with rising oil prices there is rising inflation. At such times people are more inclined towards investments in gold as it hedges against wealth erosion.

Reasons for this include the fact that gold has not been linked to changes in macroeconomic variables and thus a good hedge. Gold is not regarded as a normal commodity because of the fact that it is not destroyed when it is consumed and it is used for reasons for storage rather than physical consumption. Also statistical data proves that gold is not correlated with macro variablessuch as GDP or interest rates.

WHAT IS FUELING THE PRICE INCREASE?

The major reason behind the increase in international gold prices is the gap between demand and supply which have been caused by the expectations of high inflation in the coming years due to higher energy prices globally. In the third quarter of the calendar year, global demand for gold from investment grew by 56% where as the total demand for gold grew YoY by 7% in terms of tones. Due to global inflationary pressures, the 'Safe Haven' attribute of gold has seemed quite attractive to individual investors as well as hedge funds. The demand-Supply situation can be seen in Figure 1. On the supply side, due to lack of exploration expenditure in the 1990's as well as due to delays between discovery and production, the supply has not been able to keep up with demand from the end 1QCY04.

Local Spillovers

Y = - 1482 + 22.5(X)

When we ran a regression model between the two variables taking local gold prices as the Y variable and global gold prices as the X variable we saw that R squared was 0.8 showing that 80% of the variation in local gold prices is explained by global gold prices. With global prices of gold increasing due to the reasons already mentioned, the local prices of gold have also increased considerably. Historically the correlation between the global prices and local prices has been a high one with approximately 90% correlation between the two variables.

MEMBERS VS. THE SECP

ROUND ONE:

30th November, in a surprise move the SECP announced a new policy, that the next chairman of the Karachi Stock Exchange would not be, as per tradition, an elected member, but instead would be a non-member appointed by the SECP. This news did not go down well with the Members as they felt that the SECP was infringing upon their rights and was meddling with the otherwise smooth operation of the bourse.

ROUND TWO:

The members showed their clout and dissatisfaction with the announcement, and the market, after its rally beyond 9000, fell a hundred points in a day. The row between the two parties continued with the Members saying that they would agree to a non-member chairman, provided he was not appointed by the SECP, but by the Members of the Karachi Stock Exchange.

ROUND THREE:

It remains to be seen what course this will take as the Members now have decided to take legal advice to know their legal rights and determine the legality of the SECP decision. Who the next chairman of the KSE will be remains to be seen as the Members are adamant that this should be their decision and not that of the SECP....

NIT PRIVATIZATION

The National Investment Trust (NIT)-the largest open end mutual fund of Pakistan, is about to split into six parts for its sell latest by June 2006.

Three out of those 6 splits would be given to Bank of Punjab, Faysal Bank and National Bank while the remaining three parties would be decided after an open bid.

The privatization commission has already asked the interested entities to submit their expressions of interest by December 22 to determine the other three buyers. All the above mentioned banks already hold the letter of comfort. The letter of comfort was the letter issued by the Government of Pakistan to these banks in July 2001, to restrain them from redeeming their NIT Stock for Rs. 7. Instead the government offered to redeem the same stock in June 2006 (after 5 years) at an agreed price of Rs. 13.70. That particular deal has worked well for the banks and have they benefited billions of Rupees, reflected in the NAV for the NIT units, which have risen to to PkR 52.05 per unit (December 08).

BOP, NBP, and Faysal Bank have a combined stake of 748 million units out of the total 1600 million units (BOP 149 million units, NBP 432 million units and Faysal bank 167 million units). if the date for privatization is extended beyond 2006, they would have to first redeem the holdings with Faysal bank followed by NBP and BOP in August. That redemption will be a huge cost for NIT as more than half of their funds, from a total of PkR 75 billion, will have to be redeemed ( Faysal bank Rs. 8.6 billion, NBP Rs. 22.4 billion and BOP Rs. 7.7 billion). It therefore seems unlikely that Privatization Commission would extend the date for NIT Privatization beyond June 2006.

These three banks have gained a lot from the rise in NIT's NAV, the book value per NIT unit in all the three banks is shown at PkR. 14. Meanwhile the unrealized gain of Faysal bank, BOP and NBP on NIT units stood at Rs. 6.3 billion, Rs. 5.6 billions and Rs. 16.4 billion respectively, a fact which is also reflected in their strong EPS growth in the last few years.

ECON FOCUS

THE FORGOTTEN DEBT!

At a time when macro-economic indicators are being flaunted with all the pomp deserving of it, the descent into wilderness of Pakistan's External Debt profile is probably one of the government's biggest achievements in terms of instilling a positive psyche into the distressed brains of the ruled mass. Gone are those times when even the most passionate of optimists would have found it hard to discount the words of doomsayers. However, even though Pakistan's Total Debt-to GDP ratio still stands at a high 60%, there will be little widespread concern, as long as Pakistan's strategic importance in fighting the War on Terrorism continues to be recognized by the Anglo-Saxon Elite.

NOT OUT OF THE WOODS YET!

Going by statistics, Pakistan is still a highly indebted country. The External debt figure at USD 35 bn is not significantly below the peak it reached in June 2000 at PkR 37.86 bn. What has changed however is that Pakistan's GDP has increased by around 28% since June 2000 and post 9/11 scheduling terms have been such that the actual amount paid for debt servicing has been cut down by 66% to USD 1.6 bn in FY05 as compared to an year earlier. External Debt to GDP ratio has consequently declined from 50% in June 2000 to 25% presently. Add to that a budgetary support of USD 650 mn (PkR 39 bn) from US coffers and one understands how PSDP target has reached an impressive PkR 202 in FY05 (This year the PSDP target is PkR 300 bn). The above chart of the percentage of government revenue dedicated to debt servicing, not only shows how are fortunes have changed in recent years but also display the trouble we can wrought on ourselves if we decide to adopt a decisively oppposite Foreign Policy Stance.

HAIL THE BEST AVAILABLE!

We have stated time and again, that regardless of the constitutional legality of General Musharraf's Uniform, his anti-extremist drive at the top will continue to provide him with a multitude of foreign dignitaries prepared to visit the country, and in the process initiating some sort of trade dialog. A political upheaval and more importantly changes in foreign policy can let loose the dragon of external debt which will then come back to hound us in the form of lower development spending as well as the slight humiliation of dealing with International Financial institutions on their terms. 

INCREASE THE TAX BASE!

An increase in the tax base directed towards the agricultural overlords in the Punjab and Sindh hinterlands as well as a Capital Gains transactions on Real Estate transactions would have gone a long way in increasing the domestic tax collection base which has gone down to an alarmingly low 10.1% of total GDP, from 11.5% two years later. Failure to tackle the above issues along with the failure to build a consensus on major water resources continue to be the black marks smudging the present politico-economy setup.

INFLATION IS NOT THE ONLY CONCERN!

Privatization from major state entities, such as PTC and PSO was designed to provide USD 6-7 bn in external debt relief. However the trade deficit which we expect to touch the USD 10bn dollars this year and a current account deficit of USD 6bn is bound to severely pressurize the external reserve situation. A significant decrease in reserves from the present USD 12bn will create further pressures arising from a expectations of a further decrease as the SBP will then be battling to tame downward pressure on the Pak Rupee. In that scenario the government may be forced to increase it external borrowing.

WHAT IS TO BE DONE!

There is no doubt that the External Debt relieve is only temporary. While Pakistan continues to be a front page visitor on most newspapers, its politicians have the obligation of somehow making sure that the country's energy and water requirements are met in next five years. If we continue to play the divisive cards then God's wrath may well be in the form crushing debt payment obligations, a situation which every citizen of society will need to ponder over while he drops his children off to school.

MARKET THIS WEEK

This week started with the KSE-100 index at 9226 as the index breached the 9200 level last week. Market continued its upward drive inline with the previous week as the index closed up 2.2% WoW. Volumes were generally higher this week as average trading volumes increased by 17% as compared to last week with the average volumes increasing from 381.6mn shares to 447.6mn shares. An increase in average trading value was also visible with the average turnover increasing from USD 552mn to USD 640mn (up 16%). The week finished with the index at 9431. Monday saw the market closing up 1.3% (up 118 points) with the index at 9345. Market opened on a highly positive note with PTCL and FFBL the star performers of the day. FFBL closed up 5% on its upper limit with a turnover of 84.4mn shares. PTC also closed up 2.4% at PKR 65.6. Mansha stocks also performed well with MCB, NML and DGKC closing up 2.5%, 4.0 % and 0.5% respectively. Activity was also witnessed in the banking sector with ACBL, NBP and BOP closing up 5%, 0.5% and 1.4%. News regarding the construction of dams failed to stir the cement sector as no notable movement in the scrips was witnessed apart from PCCL which closed up 4.1% at PKR 17.7. Trading volumes were encouraging with a turnover of 610mn shares. The positive euphoria in the market continued on Tuesday as the index closed up 0.56% (up 52 points). Market once again opened on a positive note but profit taking was witnessed during the second half as the index touched an intra day low of 9333 points. However, quick covering was witnessed at these lower levels and the index bounced back as energy stocks moved up on the back of increase in international oil prices. Banking sector scrips also showed notable strides as NBP, MCB and ACBL surged respectively by 1.4%, 1.3% and 3.4%.

Cements also remained in the positive territory with D.G. Khan Cement, Lucky Cement and Fauji Cement increasing 2.8%, 1.7% and 1.5% respectively. The 9400 level proved to be a daunting task for the index to sustain. After making an intra day high of 9436, market slipped in the negative zone as profit taking set in with the index closing down 0.3% (down 28 points) at 9369. The weakening trend continued throughout the day in the index heavy weights with PTC, OGDC and POL closing down 1.8%, 0.6% and 0.3% respectively. However, on the contrary banking sector remained strong with NBP closing up 2.05%.

MCB and BOP also closed in the positive region. Cement sector also remained strong especially Lucky cement which closed up 4%. Other scrips in the cement sector followed suit with Maple, DGKC and Fauji cement closing in the positive zone. Volumes were encouraging with a turnover of 572mn shares.

Thursday saw the market recovering with the index closing up 0.46% (up 43 points) at 9418 level. There was some confusion regarding the notice issued by KSE on exit mechanism and hence volatility was witnessed during the initial period. However, recovery was witnessed in the second half with OGDC leading the upside closing up 1.22% (up PKR 1.40). Cement sector also performed well with Pakistan cement and Maple leaf cement closing up 5% and 3% respectively. On the other hand banks proved to be lack luster with NBP and BOP closing down 1.1% and 0.2%. Volumes were once again healthy with a turnover of 593mn shares.

On Friday Index advanced due to a rally in the oil sector closing up 0.1%. This upside was on the back of higher oil prices in the international market. Pakistan Oil Fields closed up 1.4% at PkR 420.70 while Oil and Gas Development Co. rose 0.2% to PkR 116.25. Amongst oil refineries, Bosicor Pakistan rose 4% to PkR 25.80. KAPCO closed on its upper circuit to PkR 50.85.

MARKET OUTLOOK:

With the index above the 9400 level and rising open interest in futures (PKR 16bn) the market appears to be on shaky footing. We advise a cautious approach with our top pick as POL, PPL and OGDC. With the expected meeting of OPEC on the coming Monday and the arrival of strong winter season in North America we expect a rise in international oil prices and hence our strong interest in the oil and gas sector.

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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