June 09 - 15, 2008

The investors in Pakistan stock markets are presently loosing confidence in the share business and seem stayed away even at the very lower levels. Last month, the benchmark Karachi Stock Exchange (KSE) 100-index witnessed across the board massive fall over liquidity problems and political uncertainty. The last week of May started with decline of the index that lost 426.96 points or 3.28 per cent eroding Rs127.927 billion from the market capital at Rs3,876.325 billion in its first trading session. The nervous investors seem to have started moving out of the equities.

In the third week of May, KSE 100-share index lost over 1,200 points or 9 per cent due to the liquidity crunch and political tensions. It fell by 1,231.15 points over the week at 13,011.74, wiping out Rs370 billion from the market capital at Rs4,004 billion. Following the monetary measures announced by the State Bank of Pakistan, the KSE 100- index witnessed the biggest single-day decline of this year and dropped by 615 points or 4.52 percent on May 23, the last trading day of third week. The decline eroded Rs187 billion from the market capital. Last year on December 31, the KSE-100 index had shed 696.83 points that was the last year's largest single-session fall after the assassination of former Prime Minister Benazir Bhutto on Dec 27.

On May 23, the Oil and Gas Development Company (OGDC), Pakistan Petroleum led the market fall and prominent losers included AKD Capital and HinoPak Motors, Arif Habib Ltd, JS & Co, Habib Bank, Adamjee Insurance, EFU General and Life, Lakson Tobacco, National Refinery, Attock Refinery, PSO, Shell Pakistan, Indus Motors, Dawood Hercules and Engro Chemicals.

KSE-100 index has been witnessing a bearish trend since this April. The index, which was at15,676 points on April 18, closed at 13,012 points last week eroding $13 billion from the market capital during the period between April 18 and May 23 . The increasing uncertainty on political and economic fronts has been the real reason behind the tumbling Pakistan markets. On political front, the repeatedly growing demand for the resignation of President Pervez Musharraf and talks of his impeachment by the major political parties of the country and dissolution of assemblies led to political uncertainty and renewed panic selling in the country's stock markets.

The country's central bank had increased key discount rate to 12 per cent from 10.5 per cent. Banking stocks have 25 per cent weightage in the KSE-100 index. Five per cent return on saving deposits imposed by the central bank, according to some analysts, came as a shock to both the local and foreign investors and it ultimately pulled down the rest of the market. Local analysts believe that the central bank's initiatives proved to be just an excuse for the already jittery market but it was long over due to curb inflation and reduce the current account deficit to put the economy back on the rails in due course. The market was actually held hostage to uncertainty on the political front and an increasing bleak economic picture, reconfirmed by the downgrading by international rating agencies -- Standard & Poor's and Moody's.

Last week, Moody's Investors Service lowered the Pakistan Government's Bond Ratings to B2 from B1 and the Foreign Currency Bank Deposit Ceiling to B3. The Standard & Poor's had already downgraded its ratings on both political and economic imbalances. The downgrading, according to some local analysts, would influence launching of global depository receipts (GDRs) and bonds in the international market, borrowing from commercial market and all other sources that may provide dollars to Pakistan. The analysts of Moody's believe that substantial fiscal loosening and poor tax collection had led to a sharp erosion of the fiscal position in the run-up to the February elections, which had not been adequately corrected. External assistance from bilateral donors and multilateral development banks could assist with a short-term boost to Pakistan's current account and foreign exchange reserves as well as offer some budget support.

The central bank has forced the commercial banks to pay a minimum of five per cent interest to saving account holders. The decision is considered by some circles as 'tinkering with the autonomy of the financial institutions' and the investors may become more apprehensive of government's intentions. Some local analysts fear that there may be more capital outflow in the coming days, as the central bank has sent negative signals about the governance capacity of the government and its inability to contain inflation and keep rupee exchange value stable.

Pakistani rupee is continuously weakening against the US dollar due to the inflated oil import bill, which hit a record level of $129 per barrel. The weakness of the rupee has its bearing on the country's stock market. The country's central bank is currently engaged in a battle to hold the rupee from free fall against the dollar, as the increased demand for US dollars from oil importers and dealers has put the Pakistani rupee under pressure. The rupee dipped to record low of Rs70 to a dollar in open market last week. While the local dealers believe that the rupee will remain under pressure in coming days, Pakistan's central bank is reportedly considering pursuing an aggressively tightened monetary policy to curb the import demand. The currency speculators have managed to earn handsome profits by exploiting the situation of ever-increasing oil prices, which has worldwide increased the dollar demand, as the entire transactions in oil trading are done in dollars.

Some analysts however seem optimistic about the revival of demand at the lower levels, particularly after the recent meeting of KSE high-ups with members of economic advisory committee. They believe that the indication at the meeting about extension of capital gains tax exemption for another year would boost the investor confidence in the share business by taking some positive corrective steps.

The perpetual political uncertainty is the root cause of all economic problems including flight of foreign capital, unstable rupee, aggravating current account deficit and massive borrowing by the government. Present government has reportedly borrowed Rs550 billion from the central bank till May 19. Supremacy of parliament and restoration of judiciary are still the major issues under discussion and the conflict between the forces of status quo and the anti-status quo indicates an unending political uncertainty in the South Asian country. Foreign investors are worried about political stability, as they see a political confrontation between the contenders of power in the coming weeks.