INTERVIEW WITH KHALID SAIFUDDIN, CEO SAFELY INVEST

KHALIL AHMED
(feedback@pgeconomist.com)

Jan 2 - 8, 20
12

PAGE: TELL US SOMETHING ABOUT YOURSELF.

KHALID SAIFUDDIN: I am serving stock and commodity markets as a technical analyst with a deep insight of Karachi stock exchange and commodities with its daily move and trend verifications.

I am more committed to educate investors on security of their investments. My comprehensive technical and tactical analysis touches all entry and exit points within a specific market and we got the guts to present the market trend during market hours. I am honored for introducing "Trading on Levels" in Pakistani market for secure trading in stocks and commodities for daily traders. I started educating retail traders about security of their investments and to do that we formed a platform named Safely Invest in 2008 after the market crash. Now it has become the most vibrant, active and largest network for KSE in Pakistan and it is also accessible for global investors. Furthermore, I am working as head of research in United Capital Securities.

PAGE: THE RUPEE HIT A RECORD LOW OF 90.03 LAST WEEK AND THE COUNTRY'S CURRENT ACCOUNT DEFICIT STOOD AT $2.104 BILLION IN JULY-NOV THIS FISCAL. WHAT ARE YOUR VIEWS?

KHALID SAIFUDDIN: The dilemma with Pakistani external account is that its flow profile is highly volatile due to many important aspects including but not limited to

1. Pronounced price effect in exports

2. Rigid import profile with lack of flexibility and

3. Heavy dependence upon non-trade related flows for covering imbalances created by negative balance of trade.

For example, Pakistan's major exports are either raw commodities like rice, vegetables, fruits etc. or products depending upon agricultural commodities i.e. textiles which are dependent upon cotton prices.

For this very reason, when the commodity prices were high in FY10, Pakistani export flows surged, resulting in a current account surplus. But as the global economy looms into pronounced sluggishness, the easing commodity prices pose an exact opposite risk to the external sector since the magnitude of exports will certainly fall, increasing pressures on the external account and thus adding to the depreciation of PKR. Moreover, just as the exports are volatile, the imports are also highly inelastic with major component being oil making Pakistani economic performance very prone to movements in international oil prices. And lastly, while the remittances have been performing impressively, easing the fair amount of pressures on external account, heavy dependence on these flows to make up for the basic trade deficit is also something which is highly questionable. With developed economies like US, Europe and Japan in recession, the remittances flows have shrunken significantly. Moreover, the recent decision of Saudi Arabia to limit the foreign exchange remittances are also a red light for policymakers here in the country.

Given these fundamental weaknesses in the external account of Pakistan coupled with heavy debt servicing outflows as the IMF repayment picks up, there is every reason to expect a depreciation in PKR vis-a-vis USD since the fundamentals don't support exchange rate stability.

PAGE: WHAT IS YOUR TAKE ON OPEN MARKET AND INTERBANK DIFFERENCE?

KHALID SAIFUDDIN: Though both interbank and open markets operate with somewhat varied dynamics, yet the underlying principals are essentially the same. Though the spread between interbank and KERB market is positive, a rapid increase in this spread may also be alarming since it would mean a run on USD causing PKR to lose its value against USD. KERB market premium can be considered as an early signal for upcoming speculative pressures. However, since a significant portion of KERB market remains outside the regulatory umbrella of SBP, thus any abrupt movement in KERB market may prove to be late for SBP to respond accordingly. A crisis in KERB market does not only affect the external account but also on direct public. A crisis in KERB market has twofold implications for the economy.

PAGE: IT HAS BEEN SEEN THAT RECENTLY INDIA, SRI LANKA AND

BANGLADESH HAVE DEVALUED THEIR CURRENCIES. WHAT COULD BE THE MAJOR REASONS?

KHALID SAIFUDDIN: While exchange rate stability is a desired policy objective along with price stability, yet many countries use currency devaluation as a tool for gaining external competitiveness. This artificial competitiveness works in a way that with devaluation, the good produced by the devaluing country become cheaper for the other countries and thus exports are increased. However, with competitive devaluation, the imports become costly and may lead to imported inflation in the economy. Since most of the Asian economies like India, China, Pakistan, Bangladesh etc. follow export led growth models, amid financial crisis in the developed world and increased international competition in export markets, these countries find it easy to gain artificial competitiveness through exchange rate depreciation.

However, unless there is not a solid investment in infrastructure and technology to make the export sector more competitive, the currency devaluation may only have a limited effect.

PAGE: HOW BENEFICIAL OR DETRIMENTAL IT IS FOR OUR CURRENCY WHEN THE DOLLAR DEPRECIATES OR APPRECIATES?

KHALID SAIFUDDIN: The currency depreciation or appreciation always has an opposing impact on two important components of macroeconomic systems: consumers and investors and producers. If the dollar appreciates, it is more beneficial for the exporters since their exports fetch additional worth for them. On the contrary, this discourages consumers, investors and government since the consumers get costly products, foreign investors face eroding returns due to PKR depreciation, the real returns for domestic investors reduce due to imported inflation resulting for USD appreciation. And, government's debt burden also increases as the PKR depreciates, resulting in more debt servicing costs, more budget deficit, more debt monetization and ultimately more inflation and macroeconomic instability. There is an opposite effect of USD depreciation.

PAGE: WHAT ARE YOUR COMMENTS ON THE ROLE OF THE CENTRAL BANK IN THIS ECONOMIC EPISODE?

KHALID SAIFUDDIN: While SBP's stated mandate includes exchange rate stability, SBP's ability to implement this depends upon 1) availability of adequate FX reserves for intervention 2) credible deterrence to speculative attacks on PKR. Almost seven billion out of 13 billion of SBP's reserves are actual IMF lent dollars, which have to be paid back sooner or later. Given SBP makes intervention in the forex market and thus drains out its rest of the reserves quickly, it will not be able to stabilize PKR but only to make it more prone to further speculation since with depleting reserves the market participants would become aware that SBP can no longer keep the PKR stable, thus creating a rush at USD resulting in massive PKR depreciation. So until the external account situation is not favorable, SBP can do only little to keep the PKR value stable.