Dec 19 - 25, 20

The growing perception is that year 2011 will go in the history of Karachi Stock Exchange (KSE) as one of the most disappointing years for investors, brokers' fraternity, and even the tax collectors.

One can attribute the dismal performance to various factors from global recession to poor law and order situation and from energy crisis to confidence deficit. However, the persistent bearish spell is the outcome of habit of sweeping the issues under the carpet. It is the easiest to blame the ruling regime but isn't it also a fact that PML-N that claims to be the opposition party has been ruling Punjab, the largest province of Pakistan. It just can't keep on blaming the federal government for all the ills because Punjab also suffers from the same contentious issues.

Many of the analysts say that the number of initial public offerings (IPOs) in year 2011 and the response of investors have been disappointing. However, the critics fail to accept that if the average capacity utilization of industrial units hovers around 50 per cent mainly because of extensive load shedding of electricity and gas, no entrepreneur will be willing to create new productive facilities.

Added to this has been poor law and order situation, presence of various types of mafias and failure of the government in establishing its writ. The conditions have been further aggravated because of the devastating floods of 2010 and 2011 damaging already fragile infrastructure.

The key sectors that have remained the favorite of investors are in trouble. To be honest, the leading players like exploration and production companies, oil and gas marketing entities, IPPs, fertilizer manufacturers and even commercial banks are operating under extreme pressure. The mother of all evils is inter-corporate debt, an outcome of not following good governance, gross inefficiencies, and above all rampant theft of electricity and gas.

Mandatory closure of fertilizer manufacturing plants and curtailment of gas supply has turned Pakistan a urea importing country despite enjoying the capacity to export around half a million tons of urea that can help in earning US$300 million foreign exchange. In fact, the government has decided to import 0.7 million tons urea which will erode foreign exchange reserves by around US$400 million and also force the government to pay billions of rupees subsidy.

Commercial banks are also under pressure due to rising delinquencies. It is often said that Pakistani commercial banks earn very high spread but little attention is paid to massive provisioning, which often reduces profit to minimum or lead to posting losses. Non-life insurance companies are facing more or less similar situation. If one examines the annual reports of leading insurers, the earnings from core business are often marginal and persistent bearish spell of stock market forces them to make huge provisioning due to erosion in the value of their investment in the shares of public limited companies.

Added to these are rising claims due to fires, riots, car snatching and the latest being credit insurance of loans disbursed to the farmers.

In the absence of investors, KSE is witnessing one of the least eventful years and the benchmark index has not managed to cross its January 17 high of 12,682 throughout the year.

Besides political noise, which is only going to increase in future, investors' sentiments have been severely dented by the global financial crisis.

When Standard and Poor's downgraded US sovereign rating, it plunged the global markets down by as much as 20 per cent, as investors rushed to perceived safe havens. Though relatively insulated from such external shocks, the local market also witnessed net outflows of US$130 million since July 2011 to date, compared to an inflow of US$170 million during the same period last year.

There was optimism that market would improve before the year ends but the dream has been shattered due to a number of factors.

The first dampener was 'Memogate Scandal' and deteriorating Pakistan-US relationship in the aftermath of Nato attack on two Pakistani border posts, suspension of Nato supplies by Pakistan and the fear of stoppage of aid/grant proved too jittery for the investors.

Moving forward to the upcoming year, the brunt of IMF payments that is to be felt from mid-February onwards will likely exert pressure on the balance of payments and the exchange rate, and investors' confidence.