INVESTMENT PLAGUED BY LACK OF PEACE

IT WON'T GET ANY WORSE THAN WHAT WE HAVE BEEN THROUGH

MULAZIM ALI KHOKAR
Jan 05 - 18, 2009

It wasn't a good year for investors, right from its start. Political transition, social disorder after Benazir Bhutto's death, war against terrorism and increasing suicidal attacks on civilian and military targets in Pakistan wobbled investor confidence, destabilized economy and crashed the main stock markets of Pakistan. Adding insult to injury, policies of the new government further aggravated the circumstances and they could not get hold of the market and economic status.

The portfolio investments have almost vanished from the scene as witnessed from the graph. The law & order chaos have played havocs with Pak economy and foreign investment in the country.

For the FY-08 foreign investments have declined by 38.39% (US $ -3.23 billion) to US $ 5.19 billion as against last year investments of US$ 8.43 billion. The major decline was witnessed in portfolio investments and privatization proceeds i.e. by 98.78% (US$ -3.25 billions) and 49.92% (US $ -132 million) respectively.

The 5 year cumulative aggregate growth rate (CAGR) of foreign direct investments in Pakistan is 52.65% & of the total foreign investments is 42.46%. FDI has grown approximately 11 folds compared to FY-04 which stood US$ 485 million in FY-08 and today it accounts for US$5,152.8 million. Portfolio investments have been most volatile, which stood at US$311 million during FY-04, marked high of US$3,288.30 million during FY-07, but declined to US $ 40.16 million for the FY-08.

INVESTMENT SCENARIO IN FY-09

FIGURES ARE IN MILLION US$

  JULY-NOVEMBER FY08 JULY-NOVEMBER FY09 % CHANGE
  FDI PORT-FOLIO TOTAL FDI PORT-FOLIO TOTAL FDI PORT-FOLIO TOTAL
Foreign Private Investment (Total) 1,712.46 105.98 1,818.43 1,603.27 -162.85 1,440.42 -6.38 -253.67 -20.79
Total Private with Privatization 1,712.46 50.38 1,762.83 1,603.27 -146.05 1,457.22 -6.38 -389.92 -17.34
Total Private without Privatization 1 579.3 50.38 1 762.8 1 603.27 - 146.05 1 457.22 1.5 - 389.92 - 17.34
Foreign Public Investment - 55.6 - - -16.8 -16.8 - -130.2 -130.2

During July to November FY-09, there has been no Privatization deal. The FDI in various sectors has shown an increase lower by 6.38% (US$1,603.27 million) as compared previous period figures of US $ 1712.456 million. We have witnessed an outflow of US $ 16.8 million on account of Foreign Public Portfolio Investments. Overall, the market has lost US $ 163 million of Portfolio Investments due to collapse of the KSE 100 Index.

STOCK MARKET COLLAPSE

The greatest pain of the domestic worsening security & political concerns is felt by stock market investors as the KSE 100 index has plunged by 58% approximately during the year from its previous peak in 2008, proved to be the worst year since 1991 for the bourses and the market touched a 4 year low at lower than 6000 on the index during last day of the year.

The capital market size (the market capitalization) in the economy which stood at 49% of GDP has now declined to 14% of GDP. Market Capitalization as of 31st December 2008 stood at US$23.5 billion as against US$75 billion on 18th April 2008.

The average daily volumes traded in the market have fallen about 45%-50% during the end of 2008 as compared to average daily volumes during beginning of the year.

Investors are still perplexed and the major reason of their reluctance in the investments was 3 & a half months long floor on account of economic instability, & feared foreign investment outflow on account of security concerns in the country. Market had lost approximately 35% before the floor and it lost another 36% in only 12 trading sessions after the lifting of floor. The floor mechanism had created an extra pressure and concern in the minds of investors, which restricted the price discovery and at last crushed the market badly.

The floor mechanism put a halt on the mutual fund investment. The most of the stock funds have ceased their redemption amid liquidity problems. Investors want their money out of the fund while the fund being stuck in the market cannot redeem the investor money. These sorts of activities have broken investor confidence on the fund managers.

The Government has now come forward to help out the CFS financiers by purchasing them the financed stocks at 12.5% discounted values as on 24th December 2008. This has somewhat helped financiers, most of them mutual fund, to minimize their losses.

With the injection of Rs. 20 billion State Enterprise Fund by NIT Friday last seems to have started blowing fresh breeze for the lifeless trading business at Karachi Stock Exchange. The National Bank of Pakistan, EOBI, State Life of Pakistan and a banking consortium have transferred Rs5 billion each to the Fund being managed by National Investment Trust. Fund which is likely to help the market regains investor confidence.

WHAT NEEDS TO BE DONE?

Currently, the markets are at their lowest PEs and offering very attractive price. Government and the long term investor like big brokerage houses & mutual fund have to come forward and help the market achieve it fair price discovery and its lost acceleration in values.

To attract more foreign investments the government needs to address the worsening law & order issues more efficiently and should resolve their political issues as soon as possible. Power shortage and liquidity problems, being the main cause of industrial collapse, need to be put to favorable conditions as soon as possible.

The power, chemicals & fertilizer sectors and financial sectors are presenting very attractive values at this time. The Government can attract foreign direct investment in these and many other sectors by presenting their existing needs in the country and bright future prospects.