Pakistan's stocks head for cliff By Syed Fazl-e-Haider
QUETTA, Pakistan - Pakistan stocks plunged to their lowest in two years on
Monday after a floor to prices on the main stock market index, put in place
almost four months ago, was removed. The decline sent the rupee to a four-week
low on concerns of increased capital outflows.
The benchmark Karachi Stock Exchange (KSE)-100 share index lost 259.7 points,
or 2.8%, to close at 8,927.4 points. Local brokers predict further falls of as
much as 50%, as a 5% cap is retained on gains and losses in the index members.
The floor was
placed on the KSE index on August 28 at 9,144 points after it fell nearly 35%
this year.
The floor had already resulted in off-market trading in stocks at up to 40% to
50% less than official prices.
Last week, the Securities and Exchange Commission of Pakistan (SECP) directed
all three stock exchanges of the country to remove the floor from December 15.
"There are no buyers in the market right now," Business Recorder quotes Shuja
Rizvi, director of broking operations at Capital One Equities, as saying.
"There are sell orders at shares' lower locks but no one is buying."
"The market is expected to decline by 40-50% from the floor level on fears of
selling by foreigners and unwinding of leveraged positions," according to
Salman Ali another analyst at CitiBank.
The rupee weakened 1% against the US dollar amid fears of sales by foreign
investors and subsequent outflows of funds after the removal of the floor,
according to local dealers. The rupee was quoted at 79.65/75 to the dollar on
Monday, compared with Saturday's close of 79.82/85.
Heavy selling by foreign investors is likely to put further pressure on the
rupee, which has already lost 23% against the US dollar since the beginning of
this year, analysts said.
"Investor confidence in Pakistan must be at its bottom; certainly, the
fundamentals on the macro side are quite bad," V Anantha-Nageswaran, chief
investment officer for Asia-Pacific at Bank Julius Baer (Singapore) Ltd, was
reported by Bloomberg as saying.
The price floor prompted US financial giant JP Morgan to suspend its equities
operations in the South Asian country last month.
PPI reported Reza Rahim, JP Morgan's senior country officer, as saying, "The
difficult condition on the Karachi Stock Exchange has led JP Morgan to reduce
the size of its equities business. The firm will retain its seat on KSE and all
its licenses to operate in Pakistan. JP Morgan will continue to operate through
third-party brokers."
Analysts generally believe the imposition of the price floor multiplied the
problems in the market, yet they see the decision to unfreeze the markets as
unpopular as it did not address the issue of the continuous funding system
(CFS) - a mechanism that previously helped the purchase of stocks with borrowed
funds. Analysts fear that a number of brokers could default this week in the
absence of a support fund and the CFS.
Brokers wanted the government to support the market through a 20 billion rupee
(US$246 million) fund and to provide a mechanism to manage the CFS.
"The chief worry is in regard to the 11 billion rupees still in the badla
[buying on borrowed money] market," reported Daily Dawn, citing a KSE director.
A number of brokers might not be able to pay margins due to possible client
defaults and the drying up of liquidity from banks.
The KSE-100 share index was held hostage to the price floor for more than three
months, as the government could not bring into operation a market support fund
and other instruments such as put options, which would have helped to provide a
soft landing to the market after removal of the price floor.
The International Monetary Fund (IMF), which last month bailed the South Asian
country out of a balance of payments crisis, has restricted the government from
using public money to bail out the stock market, where the KSE-100 share index
has lost 41% since April.
"The government is unable to provide any market support fund because of the IMF
restriction from using public money to bail out the stock exchange," reported
Business Recorder, citing Adnan Afridi, the managing director of the KSE.
"Under the agreement for a $7.6 billion loan package, the IMF should have made
provision for 7 billion rupees as its contribution to the proposed 20 billion
rupee market support fund as a guarantee to bank loans, but there was no
mention of the amount in the first tranche," Daily Dawn reported, citing a
local analyst.
"What interest the IMF has in the 'floor', it wants to ensure that foreign
investors who are trapped in the impasse suffer minimum losses after the floor
is removed," according to another analyst.
Last week, the MSCI Barra - the leading provider of investment decision support
tools to investment institutions worldwide - announced that the MSCI Pakistan
Index would be removed from the MSCI Emerging Markets Index by December 31.
Removal from the regional benchmark will lead some funds to invest elsewhere.
The securities regulator issued directives on removal of the price floor a few
hours after the MSCI Barra announcement. The benchmark KSE-100 index, trading
at 9.9 times earnings compared with 8.3 times for the MSCI Emerging Markets
Index, has become the fourth-most expensive market in Asia after China, Japan
and New Zealand. Critics blame the present government for the MSCI Barra
decision to remove Pakistan from its emerging markets index.
"It is the government that is to be blamed as the government kept market
officials totally in the dark and repeatedly said it would bail out the
cash-starved market," The News reported, citing a KSE director.
Resumption of normal trading was under doubt after the Sindh High Court on
Saturday ordered maintenance of the status quo, but legal counsel of the
regulator, the exchange and the National Clearing Company of Pakistan Ltd were
unanimous in their interpretation of the court order, which they reportedly
said was in respect of certain CFS transactions and not a restraining order on
the removal of the floor.
Some analysts believe the regulator tried to suppress a possible broker revolt
through its decision to remove the floor. The SECP directive made no mention of
the 11 billion rupees caught up in badla. "Unless an amicable way was
found to roll [the amount] over for a few months, it had the potential to push
at least 10-15 brokers to default," Daily Dawn reported, citing a local broker.
The market was "bound to fall" when the floor was removed, said Saad Bin Ahmed,
head of research at Capital One Equities, according to a report on The News.
"There has been no price discovery for the shares, which are changing hands at
up to 60% discount in off-market transactions."
The KSE had communicated to the regulator that without resolving the problem of
outstanding CFS positions, removing the floor would cause many brokers to
default, but the SECP did not respond positively, according to a Daily Times
report. The NCCPL also turned down a KSE request to roll over the CFS positions
for 90 days, the report said.
Economic growth of at least 4.7% in the six years to last December and an
accompanying influx of foreign funds helped to drive the KSE-100 up more than
10-fold. It has tumbled in the past 12 months amid a global credit freeze, a
widening of the balance of payments deficit to a record level and inflation
that has hit a 30-year high.
Analysts believe the stock market can be revived only if fresh funds can be
injected not only into stocks but into the whole financial system.
There are slim signs of hope in the economy following the recent IMF agreement.
Foreign exchange reserves rose $14 million to $9.095 billion in the week ended
December 6, according to the central bank. The central bank's reserves fell to
$5.916 billion from $5.942 billion a week earlier, although reserves held by
commercial banks rose to $3.179 billion from $3.139 billion.
Last week, Moody's Investors Service confirmed a negative outlook for
Pakistan's B3 sovereign bond ratings while removing the review for possible
downgrade.
The bond ratings were lowered to B3 from B2 in October on account of
intensified external liquidity pressures and the unavailability of, or delays
in, expected assistance from key allies and official creditors, according to
Moody's website. "The B3 ratings were taken off 'review for downgrade' on
account of the recent finalization of a two-year, $7.6 billion stand-by
financing agreement with the IMF which will avert a near-term sovereign debt
default," according to Aninda Mitra, Moody's sovereign analyst for Pakistan.
The country’s trade deficit widened 20.3% to $8.74 billion during the first
five months (July-November) of the 2008-09 fiscal year from the corresponding
period a year earlier, according to the Federal Bureau of Statistics.
Inflation as measured by the Consumer Price Index rose to 24.7% in the five
months through November compared with a year earlier, with food inflation as
high as 30.4%.
Syed Fazl-e-Haider, sfazlehaider05@yahoo.com, is a Quetta-based
development analyst in Pakistan. He is the author of six books, including
The Economic Development of Balochistan, published in May 2004.
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