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Tuesday, 21 May 2013 10:11 pm
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Profit Column
Dull and indifferent in the new year
The start of New Year has brought no immediate rewards. Dull and indifferent, that is mostly what generally describes Pakistan’s main bourse, the Karachi Stock Exchange these days. That is the general drift, so to speak, and it is reflected in KSE-100 index and volumes. There have been brighter sessions too, such as the one on Tuesday that saw the market get a 120-point boost. But these have been few and far between, and as a result the benchmark has stayed well below the 11,500 mark.
And there is nothing immediately in the offing that promises the kind of resurgence that could catapult it towards the 12,000 point peak achieved some weeks ago. But, some analysts say, things might perk up in a couple of weeks, or by close of January and early February at the latest. That is when the dividends and bonus shares are due from December-closing companies and institutions and individuals keen on making a fast buck make a bull run on the options they fancy.
For the Average Joe with liquidity, this down time in the market is also an opportunity, for he can do his buying at discounted rates. Those intending to go on a buying binge indeed have quite a few options to pick from. In the banking sector, as one had suggested before, there is ever dependable Habib Bank Limited in the mid-priced shares, while Bank Al-Habib is a decent cheap option. In between there is Allied Bank, going at under Rs58 despite Wednesday’s rise by a rupee and three quarters. Similarly UBL, at Rs54 apiece, is available at cut-rate.
Some who like to take a wager suggest Bank Alfalah, at a bit over Rs11, as one that could bring some windfall. The argument for it goes like this: it is under a new management, and its figures have seen an improvement. And the promise of a decent dividend, compared with its near base price, make it a bargain.
Sounds good, maybe too good, and one thing is certain: it is not likely to take a tumble. But expecting a windfall may turn out to be wishful thinking. Only go for it if you are in a betting mood – which means not much profit or a little loss would not upset you too much. But this scribe is not a betting man, so he would suggest treading with caution.
The really bad thing about speculation is that it is indeed ruinous even if you make a profit – because you’re lured to indulge in more and more, and finally script your own fall.
The fertiliser sector, though under a bit of cosh owing to stringent curb on gas supplies, still is most lucrative amongst the December closing shares. Here the Chhota and Barra Fauji, which in the brokers parlance stand for Fauji Fertiliser Company and its subsidiary Fauji Fertiliser Bin Qasim (Chhota and Barra neatly depicting their value, with the former give or take a few rupees nearly one-fourth of the latter) are the top buys.
The FFC gives dividend twice a year, and makes those who keep faith in it with bonus shares too. But the real sweetie is the FFBQ. If you don’t take my word for it, give close attention to Mr Ali Malik, CEO of the First National Equities. According to him, here’s why. “The FFBQ doesn’t offer any bonus shares but after every quarter without fail you’d find the dividend cheque in your mail box,” says Mr Malik. At under Rs44, it is a steal for you’re likely to get a quarter of the value back in one year. In percentage terms, the yield gets to well above 50. And that is why Mr Malik advised this writer to get a whole year’s salary in advance and invest in this beauty. It is entirely another thing what the COO of the company that owns this newspaper said when one took the request for a dozen salaries in advance to him. Regardless, one has already bought a sizable chunk and is happy with it.
The writer is Sports and Magazines Editor, Pakistan Today
Banking business in recessions
Market routs like the ’08 recession leave deep imprints in collective investor/observer psychology. Even though the term ‘credit crunch’ is not used as often as it was in the aftermath of Lehman Brothers’ collapse, it implied that the immediate effect of this particular downturn was complete drying of credit markets. The Fed/EMU decision to flood the financial sector with unprecedented liquidity banked on easing these credits markets, so banks could begin lending, subsequently stimulating investor activity, resulting in job creation and increased consumer spending.
That, as we have seen, was not to be. Every time a giant stimulus package was exhausted, banks were seen rolling back into the post ’08 risk-averse shell. That these cycles of central bank largesse invariably witnessed same pre-recession banker bonuses, which some quarters reacted to very strongly, is perhaps a topic for another occasion. But largely banks were able to convince governments of the need of continuous ‘quantitative easing’, that despite zero interest rates, if the money stopped flowing, the economy would stop working. And despite little empirical proof of the assertion, governments on both sides of the Atlantic seemingly bought into the argument.
In essence, the sovereign debt crisis in Europe is little different. Even though on the surface we read about peripheral governments’ inability to handle debt burdens, a phenomenon creeping into mainland Europe with frightening speed, the actual effort revolves around preventing Europe’s banks from collapsing. Some of the continent’s biggest banks have extremely high exposure to stalled debt, and the collapse of one can trigger a run on the entire banking sector, with catastrophic consequences for the financial elite that has had its way with policy makers for far too long. Whether or not the lot of the common man would change much in case of default(s) is debatable. Already, Europeans are subjected to harshest peace-time austerity. How a sovereign default can squeeze them further seems hard to justify.
There are important lessons for economies like Pakistan’s in the post-recession international banking saga. No matter how much one disagrees with the official handling of the credit squeeze in the west, it cannot be debated that a progressive market economy cannot function without solvent banks. And while for once our weak integration with the international financial system spared us the worst of the recession’s effects, we are still caught in chronic stagflation, and the depressed economy needs similar remedy. At such times, banks comprise the monetary intermediary that oils the wheels of economic expansion by leveraging private sector investment.
Unfortunately, Pakistan’s monetary policy over the last few years, coupled with static, risk averse banking, has severely wrongfooted crucial private participation. And the main culprit is reckless government borrowing. First, when interest rates were kept high to control inflation, government borrowing diluted the tight monetary stance, inflation remained high, and private sector offtake was discouraged. Then when rates were reduced, the government refused to cease borrowing, again crowding out private sector participation. The result has been too much money in the market (expect inflation to grow in short time), a weakening rupee (further aggravating inflation), and an unfortunate inability of private investment to create jobs and induce consumer activity. This way, there are no chances of the economy expanding beyond its unimpressive two per cent or so GDP growth. However, the government is not the only party to blame. Banks too have failed to exhibit responsibility expected of them, particularly after their impressive growth and diversification in the years following successful restructuring and privatisation. They are only too happy with the present situation, willingly facilitating government borrowing, since they provide the best, most risk-free advances the banks can make. This also exposes poor risk management, a banking sector feature held responsible for the epic collapse that plunged the entire international financial system in a tail spin.
Pakistani banks, and authorities alike, must not repeat mistakes that have prevented a coordinated bottoming out of the international downturn. Banks must make credit available to the private market. And the government must withdraw from the money market. At a time when the political/security situation has turned international investors away for at least the foreseeable future, the need for facilitating local investment cannot be stressed enough. And as much as the government, our banks must ensure our engines of growth are provided proper platforms to posture from.
T he writer is chief manager SME bank and a seasoned banker with over 30 years of experience
Market flooded with used cars
Some quarters believe that the import of used cars is the answer to providing affordable cars for local consumers. They also seem to suffer from the misconception that this will create an environment of healthy competition and will ensure a steady supply of quality and reasonably priced cars to the local market.
On the other end, the government has still not recovered from the embarrassment of allowing import of five year old cars in order to provide cheaper vehicles to consumers despite the fact that most of these vehicles are priced at the rates of locally made new cars. It appears the tax-evading mafia lobby is at its dirty tricks again and has mustered the courage to further enhance the government’s embarrassment by demanding additional relaxation on commercial import of used cars of up to 10 years old which could prove suicidal for Pakistan’s already precarious economy.
The used cars dealers lobby propounds the faulty theory that the import of used vehicles would be beneficial for the government as it will expand the tax net and add to the tax base. It is unfortunate that this lobby ignores the fact that such an approach to fiscal policy would fatally harm the local auto industry and cause huge dent in the national economy.
These short-sighted elements are also of the view that commercial import of used cars of up to 10 years age would generate revenue for the national exchequer. They ignore the tremendous manner in which such a move would upset auto parts vendors and car makers.
In reality the local auto industry has been greatly beneficial for the local economy – a fact that cannot be over-emphasiszed. The importance of the local auto industry can be gauged from the contributions that the auto sector has made to the national economy, which amounted to more Rs60 billion during 2010-11 whereas passenger cars and the LCV sector contributed Rs40 billion during 2010-11 out of a total FBR collection of Rs 1,558 billion.
It needs to be understood very clearly that import of used cars will cause immense damage to the local industry and will also result in depletion of valuable foreign exchange through dumping of junk cars in the country. The signs of revenue loss are already visible as the Government of Pakistan has lost almost 715 million rupees between January and October, 2011, by allowing used car imports compared to what it could have earned in shape of dutys and taxes from local CKD car sales. The local car market in Pakistan is flooded with imported used cars and their prices are extremely high compared to their age. The alarming increase in the import of used cars is expected to reach around 20,000 units by the end of this year. The majority of imported used cars are in the 1300 cc range and above, which clearly falls in the luxury segment. Out of the 16, 620 used cars imported so far this year, 55 per cent% were in the 1300cc and above luxury cars category, 38 per cent in the 1000 cc cars segment and a mere seven per cent in the 800cc cars segment.
According to media reports, PAMA officials have stated that mostly luxury cars are being imported under the used cars import facility which is depriving the government of valuable foreign exchange. The payments for used cars are made through illegal channels commonly known as “Hawala” in the market which makes it difficult for State Bank to even track this money laundering. The government definitely has all the information in this regard and should have reprimanded the dealers who had earlier assured that the prices of used cars would be much lower so that ordinary consumers would benefit from the facility. Allowing commercial import of used vehicles is not only unfair to the unfortunate consumer but is detrimental to the local auto industry, which has invested millions of rupees over the past decade and has been a source of gainful direct and indirect employment for millions of people.
The writer is a media
and marketing professional
Reinventing economic policies
Real investment, the key driver for creating new employment, has fallen for the third consecutive year in FY 11
There has to be a greater emphasis on the supply side of the economy. Knowledge, innovation, productivity are key drivers of the supply side economy. Unfortunately, Pakistan is falling behind in all three areas which have choked growth and slowed the innovation process. In the absence of effective competitive environment, Pakistani firms seem uninterested to invest in R & D and business sophistication to improve productivity gains and earn dividends thereafter. Thus domestic markets and consumers are faced with the inefficient goods market syndrome. Protections, subsides and other concessions provided by the government have put both private firms and public sector enterprises lazy, and inefficient.
Knowledge refers to the pool of educated/skilled workforce and technological readiness which can be effectively put to use to improve the business sophistication and productivity. It is said that Pakistan’s economy must continue to grow at a rate of 6-8 per cent if GDP is to be doubled in the next 10 years. The stop-go economic performance has suffocated the process of alleviating poverty and improving the standard of living of Pakistanis and as a consequence, the atmosphere of uncertainty runs deep across the economy.
Now the question is what should we do to take the economy out of reverse gear and run it on its smooth path of recovery? Well, building knowledge economy which is driven by technology and innovation should be the broader objective of all the stakeholders. Creative, intelligent and wise minds can improve the efficiency and efficacy of the supply side of the economy without putting extra strain on the resource market. Hence knowledge creation is the key driver in pulling the economy out of slow growth rut. To meet this end and improve the labour market efficiency, a strong nexus of industry and academics is seriously needed as the technologically advanced countries have already successfully demonstrated it.
To speak about productivity, Pakistan’s economic growth largely comes from the agriculture, manufacturing and services sectors. Services sector contributes around 50 per cent to the GDP now. To drive these sectors in top gear, educated and skilled human resource is a must. Unfortunately, the total factor productivity of the above sectors is painfully low when compared with other regional countries. Among others, low levels of literacy, use of obsolete technology and unskilled labour force are perhaps the leading challenges.
On the demand front, macro drivers are consumption, investment, government purchases and next exports. To improve the supply side determinants, key drivers, as stated above, must grow faster than the supply side determinants so that besides producers, investors also can reap the benefits in real terms. Unfortunately, as per the Household Integrated Survey, food expenditure constitutes close to half of total expenditure of a majority of Pakistanis. It is also learnt that a large size of potential consumer’s market is believed to be living on dis-savings. Nonetheless, remittances from overseas Pakistanis have risen sharply recently which has stabilised the consumption indicator to some extent yet it is not enough to plow consumption. In real terms, the indictor operates well below its potential capacity.
Real investment, the key driver of creating new employment opportunities has fallen for the third consecutive year in FY 11, according to the SBP. Also savings which feed into investment have remained low as compared to world averages. The third component is government spending or purchases, in particular, the Public Sector Development Program (PSDP). Ironically, this has already been cut so badly that it has hit the socio-economic indicators and the poor perversely. Exports on the other hand have done remarkably well despite of having an energy crisis and deteriorating security situation in the country yet the sector has immense potential to grow.
To conclude the above discussion, high growth and a competitive domestic market are pre-requisites to alleviate poverty and standard of living of Pakistanis. There can be substantial transformation in goods and labour market if growth is sustained for a longer period of time and the private sector welcomes the competitive environment including foreign competition. Local firms must learn to compete domestically before they start looking outward. As millions of fresh graduates join the labour force every year it becomes increasingly important for Pakistan to sustain high economic growth for a long period of time and create jobs for the youth. If political will exists then the task of achieving high sustainable growth can become easy.
The writer is director Szabist, Islamabad. He can be reached at [email protected]
A vista of opportunities
No economy in the world can be run without a system of thought rooted in the real lifetime authenticities of its existence
The year 2011 and its events had put up numerous pointers or signals showing effects of an economy not properly governed. Nevertheless the year has in its wake the potential and the strength to brighten the economic outlook for 2012 in many ways. This is possible only if we are prepared to think outside the box to solve troubling issues of the economy by building a balanced opinion on the real state of the union situation. In the year 2011 there was a phenomenal increase in home remittances that helped the local economy to meet its trade requirements.
In a decade home remittances enhanced from about one billion US dollars to more than 11 billion US dollars in the last year. The inflow helped bridge the trade deficit but this also generated a debate on this aspect of the economy. There is a point of view that due to inflationary factors in the indigenous economy the remittances registered an upward trend. But there is also a point of view that though remittances helped the local economy but they also resulted in producing an inflationary trend. The truth is obviously somewhere in the middle of these two opposite views.
There has been some uncertainty in many international economies as well and this factor in many ways helped to balance the negative effect. But let us remember that this opportunity must make us ponder and plan better for the future. Every year a large percentage of professionals like engineers, doctors and others migrate for education or jobs abroad. Along with efforts to boost exports it is important the planning for provision of higher education must take precedence.
No economy in the world can be run without a system of thought rooted in the real lifetime authenticities of its existence. In all likelihood, we are heading towards an electioneering regime and we are never really prepared for this. Every few years and in any political system people go to polls to elect a government. Unfortunately even after more than six decades of experiencing many major upheavals in our development in historic and economic terms we do not seem to have learnt much in the way of conducting our political economy and the way we do our politicking.
We should be quite clear in our mind that the whole idea of conducting an election is to help develop political economy of the state. There is no reason for the arguments or the debate to be bursting at the seams. Election time is a great opportunity for the nation to streamline its ideas about the political economy of the state. Just as in any private enterprise an annual general meeting is always an opportunity for the stakeholders to refresh its thinking and improve upon the way the enterprise does its business. The business of the state is spread over a large canvass where it needs to steer the economy and work on managing relations with other countries of the world for the maximum benefit of the people living in the country.
For all practical purposes the electioneering time can in fact help the economy to improve if we are only prepared to think the political and economic links in terms of workings of a modern state. In these fast changing times it is imperative we pull up ourselves to discuss socio-economic and political issues in the spirit of a nation that can learn to live decently with a variety of thought. The year 2012 is indeed opening a vista of opportunities for an economy to steer itself out of its trouble by following rational planning and taking politicking in its true spirit.
The writer has served as consultant to the United Nations and other developing economies on the issues of trade and development. He can be reached at [email protected]
Why won’t you privatise?
Since it has been well established that the mode de gouvernance relevant for the Pakistani political landscape is to avoid a horizontal alignment at all costs, the government today and in future would duck a million times if it has to, but not establish its writ in front of mob of any size. Things that one has to do to stay in power! The government would rather incur losses of more than Rs600 billion annually than stand tall to protests, which could spill over and cause subversion. This is the price the state has to pay for not being entrusted with national trust while being, very proudly so, democratically elected.
In the state’s defense, it is like walking on a very thin rope to extract water out of a deep well. Once the privatisation process is initiated, the discourse surrounds burnt cars, corruption, lost jobs, the much higher than ten per cent cut, and concerns regarding the possibility of being able to mend the black sheep. On the critical end, successive governments have been unable to prove their worth on this front (among all others) and privatised entities are still surrounded by deep controversies. Now only if we had only one favourite; the non-transparent privatisation of PTCL has resulted in losses of more than a billion dollars (Rs89 billion)with ambiguity on whether the entire payment has been received, and, KESC’s liabilities (contingent upon GoP) have grown to Rs160 billion from reportedly zero at the time of privatisation.
Moreover, processes that were initiated, such as the case of PIA, met with severe criticism although the organisation has negative net worth of about Rs63 billion and accumulated losses of more than Rs90 billion. Similarly, Pakistan Railways incurs an annul loss amounting to Rs15 billion, has been injected with Rs10 billion in the last two months. Commentators lament loss of about 400 engines, which were, by the way, as old as the country itself, while about a hundred or so original and very antique masterpieces are by the grace of god still functioning. Recently, sighs of relief were heard when some engines convalesced, as there is much talk of privatising the white elephant.
So clearly, things are out of control and the government cannot afford more dissent and disapproval than what it already faces. But if one were to compare the Rs600 billion loss with the Rs300 billion that the government intends to spend on the country’s education, hospitals, roads, in sum all of us, the writer cannot help but feel wistful at the prospects of having about a trillion rupees being available to spend purely on development. And if one were to compare, the Rs743 billion paid in direct taxes with the said amount, it would be unnatural for the salaried/middle class to not feel infuriated and push demands for expedient privatisation.
As of Oct-11, the credit extended to Public Sector Enterprises amounted to Rs407 billion, about Rs19 billion higher than the beginning of the year. If one were to keep the losses in perspective with this amount, one would only wish a lot of luck to banks that have lent out this money. On the same end, credit to the private sector has gone down by Rs37 billion during the Jul-Oct’11, thus it is not just the prospect of recovery but the opportunity costs that have to be brought in perspective.
In the heart of hearts, nobody wants anyone to die. But in the current scenario, a larger group of people is being choked to support a few. And sadly, it’s not just for now and today. There is no solace.
The writer is an economic analyst and freelance financial journalist. She can be contacted at [email protected]
The jingle bells of creativity
Living in a corporate world, one happens to hold up to the cliché that money can buy everything. As part of the deal, the rich get everything and the poor become losers of the game. Looking at the quality of advertisements today, it often strikes me, if creativity is also synonymous to the amount of money spent. A general rule of thumb suggests that all the big companies usually come up with more creative ideas than the smaller companies just because they choose to affiliate themselves with renowned advertising agencies that mostly have good stuff in store to advertise the product in a unique way. It is thus, very strange and a matter of concern for many of us. But realistically speaking, just like money can’t buy happiness; money can’t buy creativity either. We as a nation are instilled with some serious creativity in the real sense. No one can doubt the level of creativity that we are bestowed with; some smart Asians we are. Creativity is not a science, it is an art. An advertising campaign that sends the message across its audience can be deemed creative even though it can get on your nerves. If we look at a very poorly designed commercial and forget about quality issues for some time; I recall some mind boggling jingles that literally made one beg for mercy, but were actually very effective even though we detested them to the extreme. Admit it, we still remember those catchy slogans and I pay tribute to all of them with hats off and a thousand bows. Telefun has to win the creativity gift hamper for drilling ‘0900-78601’ into our heads. ‘Gaye soap sabunon mein toap’ was also creatively designed to remain etched in our memory, even after so many years. ‘Kis nay kaha tha kay Pepsi pay paanch rupay kum kerdo?’ and ‘Kis nay kaha tha kay Pepsi 65 ki ker do?’ I swear, none that I know, made this grave mistake. But Pepsi managed to worm its way into our minds by a genuinely lame yet creative concept. Similarly, we also acknowledge that ‘Maza awami kha badami…’ and The Jazz Jazba’s famous songs made sure, we cry more on the consistency of the over exposure of these jingles, so that we can forget the trauma of watching Pakistan lose in the Cricket World Cup.
On the flip side, the theory of ‘Naqal and Aqal’ also comes rightly into play when we cheat creatively. Just recently, I was reminded of this when a popular magazine took up one of my articles as their ‘letter to the editor’ and the paradox of the creativity was that it was published right under the letter whose title read, ‘plagiarism’; eliminating the slightest of possibility to even think of the above content as being fabricated. *Round of applause*. Coca-Cola, along the same lines, started targeting the cricket lovers and their spirits of hope, after Pepsi had already targeted the cricketers and the cricket team. Pantene wanted us to try and test their product to make sure that it is the number one shampoo and Sunsilk, the very next day, tells us that it is already tried and tested that Sunsilk is the number one shampoo. The debate of creativity is strongly tied with intellectual property under which, a set of exclusive rights are recognised for a number of distinct types of creations of the mind. However, creativity may not always mean originality, which is why, often marketers argue that creativity breeds creativity and if the ideas are copyrighted, it would leave no room for their improvement. Had Graham Bell copyrighted the telephone, mobile phone would not have existed today. I’d have to agree to this too, to some extent, as long as the originator gets his due credit.
The writer is Sub-Editor, Profit. She can be reached at [email protected]
Brazilian coup
In a sudden shift of fate, the Centre for Economics and Business Research (CEBR) noted, that Brazil has now officially overtaken the UK as the worlds sixth largest economy. With the way things are going, especially taking toll of the European debt crisis, by 2020 Britain’s economy will officially be overtaken by Russia and India. They have also predicted that by 2028 Brazil will officially enjoy a per capita income that will almost be equivalent to that of Britain. In other and more simpler words, by 2028 the standard of living of the average Brazilian will be better than that of the average Britisher. This historic paradigm shift has been a result of a clear dichotomy in policy making, where on the one hand, credit and debt creation was fueled and encouraged while on the other prudent economic policies were pursued, essentially aimed at self sustenance.
More interestingly, with the ailing economies of Europe and the US, China is yet to show their strength and flex their muscles. What Brazil has successfully done and the other western powers have failed at is the creation of just human centric policies that are aimed at poverty alleviation. The fifth most populous country of the world launched an anti poverty campaign under the slogan “opportunity not favours”, that supports millions of families and covers health and education programmes. The programme that was first initiated under Luiz Inacio, and now is operating under Dilma Rousseff pledges to take 16 million Brazilians “out of destitution”.
While countries were focusing on wealth creation even if it wasn’t backed by real money, Brazil focused more on wealth diversification and redistribution. The wall street rioting reinforce the fact that without focusing on human centric policies, the entire spectrum of what is being ‘dubbed’ development will instead of lending credibility to the governments, snatch it away from them. Expansion of the middle class has also been phenomenal which has risen owing to Brazil’s diversification in the manufacturing and sevices sector. Even though growth is expected to sharply decline this year, to 3.5 per cent, it is now anticipated that it will rise sharply by 7 to 8 per cent in 2012. With growth comes responsibilities and while the west was wasting its energies on scorning at South America and the Middle East, Brazil used that opportunity to make some valuable and unlikely friends – Venezuela’s Hugo Chavez and Iran’s Mahmoud Ahmadinejad among them.
These changing paradigms imply that even if the West wants to, they can no longer treat Brazil and other Latin American states as subservient nations, built and constructed to serve their interests. The Monroe Doctrine no longer exists and such mentality would have to change sooner rather than later. The rise in power of states like China, Brazil, India, Indonesia, Nigeria and South Africa means that the underdogs are now winning the race. The eurozone will eventually have to learn lessons from the likes of countries like Brazil and China. Despite the recent recession it seems as if policy makers have not learnt the lesson and militarily UK remains to be one of the biggest spender as a proportion of its GDP despite the latest tranche of cuts. With this paradigm shift the western countries must now prepare not only for the skilled not being able to find jobs, but also for the highly skilled to look for greener pastures elsewhere around the globe. With these glaring realities, Britains demotion to a middle ranking power is now discretely accepted across the globe.
The writer is a freelance contributor
Providing more than marginal impetus
Let’s not be scathing, let’s not criticise for kicks; putting it simply, the SECP has got it right this time round. The recent amendments made to the Securities (Leveraged Markets and Pledging) Rules, 2011, are welcomed respite for capital market participants at a time where all-round dullness seems to dominate. The actions of the regulator insofar as providing an investor friendly platform to boost capital market activity needs to lauded in this case. The key word here is ‘investor friendly’ and the changes in regulations surely fit the adage well. This was the primary intention behind the introduction of Margin Trading products when re-introduced into the market in 2009. However, for one reason or another, the product failed to spur activity and lacked attractiveness. The changes supplement the affordability of the product and provide it with better appeal for investors now.
Let’s take stock of what the key amendments encompass: (I) At present, borrowers who wish to take up leveraged positions through availing margin financing facilities are required to deposit and maintain a minimum of 25 per cent ‘cash only’ margin. This was posing to be a dampener for stock market activity as the requirement is surely pocket heavy. SECP has offered relaxation by likely reducing the cash requirement (amount though still not disclosed) and also has indicated that a part of the margin can be furnished by certain selected shares as a pledge too. In simple terms, it now costs less money upfront to take up a leveraged position in stocks. (II) Individuals have also been allowed to act as financiers for Margin Trading as opposed to the current situation of only institutions providing financing for the purchase of shares.
It is exactly the purchase of shares, in turn daily turnover, which facilities like Margin Financing encourage. Designed on a ‘borrow and buy’ principle, leverage stimulates market activity and should help investors engage more in transactions boosting average daily volumes. The last few years have seen participants struggle with a bout of illiquidity that has hurt business prospects for brokers, in addition to compromising on price discovery for investors. It should also assist in building market depth and attracting more people to the local bourse – both local and foreign alike. But is margin financing the magic wand which waves the troubles goodbye or do other factors also come into play?
Insofar as providing the favourable conditions for trading activity are concerned, the SECP has been spot on in the aforementioned amendments. However, another issue that the regulator needs to address is that of Capital Gains Tax (CGT). The tax has delivered benefit to neither the government, nor the payer – well it shouldn’t for the latter anyway. Most of the concern over this topic hinges around the information heavy needs of filling and dubious collection mechanism. Reforming it in another way and automating collections would serve purpose here. Then the general sense of risk aversion in a weak economic environment is another hindrance. While not much can be done about that from the regulatory front, raising public awareness of the attractive valuations available at the local bourse (5.7x for 2012E earnings) should aide in attracting investment. Nevertheless, let’s not get greedy and focus on one step at a time.
Coming back to Margin Financing, it is pertinent to mention one key point that should not be left untouched here. Recalling that excessive leverage was a key factor behind the 2008 stock market crisis, one must be aware of the dark side attached. Like all borrowing principles, borrowing magnifies the quantum of gain or loss given a particular movement in the underlying price of a stock. Lower initial margin requirements can also aide in speculation, precisely the problem that surfaced three years ago. However, this recklessness can be tackled through robust risk management frameworks and formation of a ‘fit and proper’ criterion. A balanced stance needs to be achieved between relaxations and tightening; where tilting towards either extreme undermines the regulator’s standing. The move explained above is a move towards such a balanced position and is certainly a good grounding for revival.
The writer is a financial
analyst and freelance journalist
Islamic banking and social reforms
Islamic banking is not just about conducting financial transactions in compliance with shari'a. Rather, it is fast becoming part of a new Islamic financial lifestyle, which in turn is giving rise to a modern Islamic lifestyle. While most observers of Islamic banking refer to Islamic banking in the context of an Islamic economic system, it is equally important to look into social implications of Islamic banking. What are these social implications?
Firstly, Islamic banking is popular amongst modern and moderate Muslims. Mostly, conservative Muslims shy away from Islamic banking because they are not sufficiently convinced of the shari'a authenticity of Islamic banking. The profile of a user of Islamic banking services includes those who are relatively young (up to the age of 30), educated (mostly to a degree level)- many of them having been educated overseas and hence exposed to living in a multicultural and plural society - and professionals or those with business backgrounds. Trading communities, who happen to be observant Muslims, are perhaps one exception amongst conservative Muslims who prefer to patronise Islamic banking.
Secondly, Islamic banking provides one of the very few credible examples of an application of Islamic principles to the modern phenomenon of business activity. Another notable example of the successful application of Islamic principles to contemporary society is in education (there are several international Islamic Universities in Muslim countries, and a large and increasing number of modern Islamic schools). But Islamic banking and finance remains by far the only modern application of shari'a, which has spread all over the world.
Thirdly, Islamic banking and finance is serving as a catalyst for rapid developments in islamic juristic thinking. Continuous search for new tools and innovative use of nominate islamic contracts for product development has initiated a lively debate on "dos and don'ts" in contemporary islamic jurisprudence. While the principles of Islamic jurisprudence (called usul al-fiqh) remain intact and undisputed, applied Islamic jurisprudence is evolving
accounting for the developments in the financial markets and Islamic banking and finance. A number of madrasas (notably Darul Uloom Karachi) have started producing graduates who are experts in fiqh and finance. Many of these graduates now serve as shari'a advisors with Islamic banks and financial institutions - a clear divergence from the traditional careers such graduates used to go for in the past. Consequently, we find graduates of madrasas and Islamic universities in the fields of economics, banking and investment management. This is bringing about new social trends that are in favour of engaging the religious intelligentsia in the mainstream of business and finance.
In a country like Pakistan where the ethical fabric of society is almost ruptured, there is a need to make Islam relevant to the socio-economic needs of ordinary people. Islamic banking can potentially play an important role in this respect. It can serve as a training academy for ethical behaviour and islamic principles of trade and finance. For example, there are three fundamental prohibitions in Islamic banking and finance: riba (interest), gharar (decep-
tion and concealment of information), and gambling. These three prohibitions are based on the principle of justice and fairness. interest is prohibited because it allows one party (eg., lender) to "eat another person's belongings unjustly." Deception and hiding information is not allowed for obvious reasons. Gambling has its own socioeconomic implications.
If these three prohibitions are inculcated in the behaviour of users of Islamic financial services, this will lead to the development of a new ethical code in the society. "Devouring others' property unduly," deception and fraud, and gambling and taking excessive risks are the types of hazards that can not only destroy individual lives but also ruin societies. The movement against interest, a "casino model" of banking, and reckless investing by banks and financial institutions is gaining momentum in the West. This is perhaps time for Muslim countries to devise a new model of financial intermediation, which is based on social justice.
Apparently, there is an added emphasis in Pakistan on justice in the wake of the increasing popularity of Pakistan Tehrik-e-insaf (PTI). Islamic banking can certainly play an important role in bringing up socio-economic justice to the country. While other parties have by and large failed to capture the opportunity of using Islamic banking as a tool for socio-economic reforms, it is high time for PTI to embrace Islamic banking as part of its election manifesto, and appeal even more to the younger generation in the country. Let us see if Imran Khan pays attention to this important phenomenon, in addition to welcoming defecting members of other parties into the PTI.
The writer is a Shari’a advisor to a number of banks and financial institutions and can be contacted at [email protected]
Zardari, I love you
Being a third world country has its own disadvantages for the politicians that inhabit these lands. Unfortunately, as fate would have it they were born in Pakistan, and not in the family of Queen Elizabeth I, royalty they truly deserved. Amongst other things, the cost of living has increased tremendously for these parliamentarians, the ‘elected’ representatives of the people of the country. George Orwell summed up equality in perhaps the most Pakistani context. ‘All men are equal, yet some are more equal than others.’ Clearly, the parliamentarians, the ‘chosen ones’ are more equal than the rest of the nation and while inflation might have taken its toll on the ordinary man, it has hit the parliamentarians harder than anybody else. It is therefore unfair to blame the present regime for doubling the national debt in four years – it took us 60 years to borrow 4.8 trillion and it now stands at 10.5 trillion – which increased by a mere 5.7 trillion. A man i hold in high regard, Farrukh Saleem, in his recent article mentioned some staggering statistics that I will mention in the course of this article. I feel extremely sorry at the plight of the parliamentarians. The depreciating rupee, the widening trade deficit, the fiscal deficit, the circular debt, the loss making PSE’s, the cost of financing their humble abodes are truly taking a toll on our chosen, elected representatives. ‘Democracy is the best revenge,’ I heard this somewhere, but I would rather push my own self in harms way and allow democracy to take its vengeance on me, than allow it to perturb our honorable parliamentarians. Unfortunately, democracy is taking its revenge from a democratically elected government by subjecting it to problems that are greater than the peaks of Nanga Parbat. My love for our ‘chosen representatives’ cannot be summed up in mere words, nay, I’ll have to dip my pen in blood and even then it won’t do justice to the greatness of our democratically elected government. So, I would rather see my child starving than watch the children of our representatives being denied of their gaming consoles and luxury vehicles. I would rather sleep in freezing temperatures than allow gas to be interrupted to the highest echelons of power in Islamabad. I would rather walk to earn a source of livelihood, than watch our masters fret over the protests that bring a sweat on their brows, and I’m glad they still sleep like a baby at night. I would rather give up what is rightfully mine, for someone incompetent because he is more equal than me. My request to you all, love thy masters. After all, the political costs of running the government has now exceeded Rs1 trillion. The cost of the PM secretariat has increased owing to ‘inflation’ by a massive 137 per cent, to Rs15 lakh a day, 365 days of the year. With teary eyes, I look wistfully at the humble abodes of our masters. How they must struggle in these difficult times. The cost of the cabinet division has swelled to Rs80 lakh a day, 365 days of the year. The cost of running the President house is now Rs13 lakh a day. And yet, despite all their troubles, they do not spare a thought and smile cheerfully back at us. Oh how they care for us, if only you could see. The power sector consumes Rs100 crores a day, that’s Rs360 billion a year, or 2.5 per cent of Pakistan’s GDP. in addition to the power sector 42 other public sector entities are losing Rs100 crore a day. As for the national flag carrier, in the third quarter ending September 30th, PIA reported a loss of Rs8.3b or Rs100 million a day, every day of that particular quarter. ‘At Emirates, an airline that PIA helped build, profits this year stand at $1.5b or Rs350 million a day, up 51.9 per cent’ Dr Farrukh writes. Well, thankyou for these wonderful statistics Dr Sahab. i now understand the hardships being faced by the democratically elected government. They truly deserve a round of applause. Nobel prize for bravery perhaps. I mean, you tell me? How many people do you know who can grin cheerfully, just when they’ve thrown Rs1,000,000,000,000 in the gutters. Not many. I thought so. And this is why, I love Asif Ali Zardari and the democratically elected government.
IKnomics – walking the PTI talk
Imran Khan's 'tsunami' has hit the coast of Karachi and Pakistan's financial hub is buzzing with excitement. In a space of a couple of months, the Pakistan Teehrik-e-Insaf (PTI) has transformed from a party on the fringes to an All Star Galácticos – the Real Madrid CF of Pakistani politics. The influential business community is watching with great interest and intrigue.
PTI has played its cards smartly and over the last few months has won over confidence of the business community in a series of organised and strongly worded gestures. This includes putting forward a 100-day plan in July 2011 which focused primarily on corrective measures to pull the economy out of the downward spiral of record high inflation, rising unemployment, crippling energy crisis and unsustainable debt burden. The cornerstone of the 100 days strategy is to raise tax revenues, curtail expenditures and give confidence to expatriate community to invest more in the future of Pakistan.
In a nutshell, PTI aims to raise tax revenues to 20 per cent of GDP within five years from less than 10 per cent of GDP today and increase foreign investment to $10 billion annually within five years from $1.5 billion today. Even if partially successful these measures will boost growth to above six per cent of GDP and create over five million new job opportunities. Perhaps more importantly this growth will not come at the cost of record build up in price pressures.
A stable Pakistani rupee and reduction in money printing by the government will help to bring headline inflation below eight per cent, compared to 14 per cent in FY11.
This will reduce cost of doing business in Pakistan and encourage higher investments in the economy. PTI’s think-tank believes that if these investments are channelled into three key projects then the growth trajectory of the economy will rise to above 10 per cent over the medium term, creating nearly eight million new employment opportunities. These projects include developing the Reko Diq project, the 5th largest copper and gold deposits in the world. The second project targeted is to develop the Thar coal deposit to produce 5,000 MWs, or 1/5th of the total power generation, and curtail the dependence on oil imports. Last and perhaps most importantly the construction of the Diamer Basha dam to produce 4,500 MWs and support higher agriculture production.
The PTI economic reforms agenda largely reflected aspirations of the business community and international financial institutions including the International Monetary Fund. The proposals on economic reforms sent by the Pakistan Business Council to the government ahead of the FY12 budget shows strong convergence with the steps outlined in the PTI's 100-day plan. Similarly, IMF has linked all future funding to Pakistan based on progress on tax reforms and energy sector reforms.
However, carrying out these reforms is a Herculean task even at the best of times and most experts will testify that if somehow PTI does form the next government in the 2013 elections, they will take over at a time when the economy will once again be on the verge of a bigger and more painful balance of payment crisis than in 2008. The crisis in 2008 led to a 28 per cent drop in value of the rupee and fuelled record high inflation. In many ways Pakistan is even more vulnerable to a crisis today than in 2008 due to extremely flawed energy policies, with dependence on imported oil rising sharply due to the deterioration in the energy mix.
No government in the last sixty years has been successful in implementing these politically difficult decisions and the reasons are obvious. No one wins elections on the promise to put more taxes and undertake austerity measures. It didn't work out too well for the Italian Prime Minister Silvio Berlusconi, it appears to have hurt President Obama chances for a second term and Pakistan is no different. Hence all mainstream political parties have shied away from making tax reforms a part of their political manifesto.
PTI has taken a huge political risk by putting tax and austerity reforms at the centre of its political manifesto but this bold initiative has paid off handsomely for PTI. It has given them a de facto leadership role in representing the demands of the business community by bringing these demands to the centre of the mainstream political debate. It has also removed the myth that putting economics ahead of populist slogans is bad politics. This is obvious watching the swelling ranks of PTI and growing appeal of the PTI reforms agenda amongst the rural and urban youth of Pakistan.
The author is a former World Bank employee and currently works with a leading commercial bank
Wait and watch
The trend in volumes has been extremely sluggish day in, day out throughout the last week. And the KSE-100 benchmark has remained singularly one-dimensional – flat. If there was a rise it was in single digit, ditto for the fall, the only exception being Wednesday when the rise was 40 points plus. The volumes have been so low that the first two sessions this week witnessed just 20 million shares traded, while on Wednesday it jumped to the vicinity of 35 million – definitely far below the market’s heydays. But this was not unanticipated. This being the holiday season in Europe and the US, not to mention the Far East, the activity channelled through the trading houses from there comes to a standstill. As for the local investors, there is too much uncertainty, and the inspiration provided by gains from dividend and bonus shares are somewhat far off to perk them up.
With absolutely nothing driving the market, mostly jobbers – for the uninitiated, speculators who buy at some point on any given day and offload their purchases for a little gain or loss in the same session – have only been active, and that too quite sporadically. This also is understandable. The jobbers become hyper when there is volatility. That is when they smell profit. No fluctuation means no real opportunity for a quick buck. So, they too wait and watch, listlessly looking at the computer screens now and then to keep abreast of the goings-on, all this while monotonously munching on gram and little sugar pellets that is the staple with which brokers entertain them, before filing out around the time of closing.
For the Average Joe Investor, there are nuggets to learn from in what the big daddy amongst the stockbrokers, Mr Arif Habib, chairman and CEO of the group named after him, said on Tuesday at a reception in Islamabad. In a nutshell, this is what he said, “Economy is improving but we are faced with a bigger problem of perception… Our capital markets are one of the best in the world, giving 31 per cent return on average in the last 10 years but it is also facing the issue of image… Interference in the capital markets hasn’t helped bring improvement… There is no Capital Gains Tax in most countries and the system is not as frequently altered in developed countries.”
Mr Habib is anything but an Average Joe Broker. He knows his turf better than a shark would know its patch in the sea. Indeed there are some who may know the market as well but there are few who could manipulate it better than him. In all three points picked from his little speech, every word is drenched in depth and wisdom. Seldom are even the best speakers this precise and objective – hitting the nail on its head unerringly time after time. The CGT is an issue that has acted as a bugbear for the market for quite some time now. And the recent spurt of lobbying has come to naught, for the federal finance minister Hafeez Sheikh has shot the proposal down with the kind of finality that is not likely to endear him with the brokers. The perception part too is critical. In these troubled times there are other reasons why foreign traders have pulled out large chunks of investment from our markets, but our much battered image too is one serious pickle.
The return of investment part of Arif Habib’s speech has been talked about too often in this space to bear repeating. But this is something that should reinforce the Average Joe Investor’s faith in the market.
Last week one had talked about ‘a few mouth-watering buys in cheap and middle range that one has discovered’. But again, the word count is up, and since nobody is in a rush to buy and there is nothing to lose in waiting for a week, so until next Thursday.
The writer is Sports and
Magazines Editor, Pakistan Today
The Chinese juggernaut
China has over the last several decades emerged as the worlds single most dynamic economy but this progress has been more marked ever since it began its transition to a more market based economy. The question though is what in effect drove them to make these changes. Technological advancement in economies began from the industrial revolution that accelerated the pace of development mostly through the mechanization of work and processes, breakthroughs that were led by scientists and engineers in their laboratories.
The Chinese juggernaut picked up pace after Mao Zedong and other Chinese leadership began to reverse the backwardness of the region by adopting a policy which facilitated the construction of advanced capital intensive industries. Such a strategy eventually enabled China to test the nuclear bomb in 1960 and soon after launch satellites in space in the 70’s. However the economy was still fairly poor and agrarian in nature, with little comparative advantage against other such capital intensive economies. The firms required government protection and policies of import substitution, subsidies and administrative directives. While these policies were in some measure successful, they could not jump start economic growth with the performance being relatively poor.
What stood out when finally the transition of the Chinese Goliath to a market based economy started in 1979 was that the leadership under Deng Xiaoping did not resort to a policy of privatisation or trade liberalisation. Instead it continued to strengthen the domestic industry through government patronage and simultaneously allowed private enterprises to invest in the labour intensive sectors that were comparatively repressed but consistent with Chinese comparative advantage.
Such an approach paid great dividends as it enabled the country to not only achieve stability but also paved way for economic growth. What exactly are the dividends? Well, they have witnessed 9.9 per cent of average annual GDP growth and 16.3 per cent of annual trade growth over the past 32 years – growth that holds lessons for other developing nations. The result of integration into a more market based economy has been that the country is now the worlds largest exporter and second largest economy. A gargantuan 600 million people were pulled out of poverty owing to such developments.
The moral of the story is that progress and economic growth are not lofty ideals but quite achievable if a dedicated team of policy makers and visionaries are bent upon producing results. The global economic recession has hit the developed world hard, however it has simultaneously presented the emerging economies with the opportunity to tap into the developed markets, to fill in the void since these economies remain relatively unaffected. It comes as no wonder that one third of the worlds savings originate from Asia. Therefore the way forward is for Asian countries to invest in infrastructure, human resource and capital intensive industry. More importantly after the Asian economies were shaken by the financial crisis back in the 2000’s they made a concerted effort to move towards financial self reliance. The transition of Asian economies to self reliance was in stark contrast to the massive debt creation, unprecedented leverage and credit creation frenzy of the developed economies.
What eventually ensued were large imbalances that shook the economic landscape across the globe. In the wake of such imbalances the strength of the Asian economies have increasingly been highlighted and they can continue on their path towards dynamic growth. While some may be quick to argue that the performance of a country of over 1 billion people cannot be replicated however, what policy makers need to understand is that all developing countries can enjoy similar successes to sustain economic growth and reduce poverty exponentially by merely exploiting the benefits of their backwardness, exporting technology from the developed world and upgrading industries. The recession for Asia is an opportunity to bottom fish yet again.
The writer is a professional
banker and financial commentator
The European dilemma
When Giuseppe Mazzini was at the forefront of the Italian political scene in the mid-nineteenth century, he was vying to unite a previously disjointed Italy. Once that was achieved in 1871, Mazzini reiterated that the unification of Europe was the continuation of the Italian unification. While the idea made sense even back then, Europe was marred by a plethora of antagonistic forces sandwiched between the German and Italian Unifications and the culmination of World War II. That moment onwards Europe has collectively hankered after sustainable unity, to extinguish the demons of their violent past, but that hasn’t managed to materialise for a multitude of reasons. The question of European integration has an uncanny tendency of resulting in a throwback to the past. And with Europe falling from the apogee of its heyday, the continent has found it hard to deal with the changing global picture.
Historically USA has provided Europe with the sole model for a single market, but global economic convulsions have meant there is an upsurge of Asia and Latin America as well. Experts opine that soon the eurozone GDP could lag behind China as far as purchasing power parity is concerned. And even more alarmingly there is a possibility that China, when coupled with India, could amount to nearly twice the size of the eurozone economy. The cumulative GDP of G-7 countries could diminish owing to the recent upsurge of nascent economic powerhouses. Hence, it goes without saying that Europe is far from being a part of any geopolitical status quo - if one exists – and it must collectively endeavour to overcome the political and economic differences within its ranks.
Considering the fact that any unification involves the collective good and the vested interests, clarity in differentiating and apt prioritising is a prerequisite for progressing together. David Cameron’s ‘holier than thou’ standpoint at the recent EU summit was a perfect example of what should not be happening, for the eurozone to climb the pecking order in the global matters. Obviously, the foremost task of every individual member state is to ensure that its own unit attains as much stability as possible. This can only be achieved via responsible policy making on the part of individual governments, who should take measures that prove to be fruitful for their own interests but that also, cater the greater good of the entire zone. It is all good compelling individual states to follow a rulebook, and for those who prove to be incompetent conditional aid is another popular choice; but every country should be given an opportunity to cleanup its own mess.
Now, for those countries who have generated so much mess that they are forced to wash their dirty linen in public – or worse, who are dependent on others for a purge out- an authoritative, yet considerate approach on the part of the Who’s Who of the zone is required. The formulation of budgetary policies, of the countries that find themselves in a hole, is the most telling task for any authority, and therefore, it should be handled meticulously. This would require a metamorphosis of thought process at the European helm, and the powers that be must embrace the redefinitions of sovereignty and authority among other things. The interlinked web that the eurozone has become connotes that sifting collective interests from individual standpoints would take an unprecedented level of mutual understanding, barring which the European cauldron would continue to simmer on endlessly.
Any planning for the future for the Europeans should encompass both the fiscal policies and competitive policies and the imposition of “second stage”. The executive duties should obviously continue as they exist presently, but another important factor worth considering is the presence of a ministry representing the eurozone in international financial institutions. The creation of a European finance ministry is proving to be inevitable; and if it isn’t formulated in the days to come, it would have to be formed for better supervision of the financial sector eventually. For example, G-20 members envisage Europe as a whole rather than focusing on its member states individually; and hence collective representation would prove to be unavoidable one day.
Any student of European history is well aware of the historical problems that the continent has had to face. And now with the continent at the crossroads of epoch-making developments a collective effort, that supersedes historical animosities and egoistic approaches, is required for the zone to penetrate into the upper echelons of the global geopolitical structure.
The writer is Texas A&M University
graduate who is currently employed with
Telenor in the Products - Commercial Division.
He can be reached at [email protected]
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