Pakistan Stock Exchange outperforms global equity markets

Inching towards another milestone of 48,000 level, benchmark of Index of Pakistan Stock Exchange (PSX) closed the week ended on 30^th December 2016 at an all‐time high of 47,807, up 2.52%WoW. Activity at the bourse tapered 15.06%WoW with average daily volume at 286 million shares. The volume leaders were DSL, BOP, KEL, DCL and TRG.

Key news flows during the week included: 1) Ogra recommended increase in POL prices, 2) CNG prices increased across Sindh, the first hike following the GoP’s decision to deregulate the country’s CNG market, 3) GoP rejected all the bids in PIB auction, 4) ECC of the cabinet approved export of 225,000 tons of sugar without any rebate and allocation of 26MMCFD gas to EFERT old plant and 5) Lahore High Court nullified the auction of DTH license carried out by PEMRA after striking down the rules and regulations which barred broadcasters from applying/participating in the bidding process.

Performance leaders during the week were: EFOODS, HCAR, FCCL, SHEL and SNGP; while laggards included: HMB, AICL, PSMC, POL and PTC. Foreign participation continued its negative trend with US$17.9 million outflows compared to US$45.5 million in the last week.

After a phenomenal end to the calendar year, PSX posted remarkable return of 45.7% in CY16, outperforming the world equity markets. The market is likely to continue its positive trend in the near term in the absence of any negative trigger. However, room for volatility in the next week remains where risk could emerge in the form of: 1) international oil price swings on potential concerns on the rising US inventories and 2) resumption of Panama leak case proceedings.  

Following its previous month performance, fertilizer offtake remained promising during November'16 as well on the arrival of Rabi season coupled with continued support from subsidy package announced in FY17 budget. After declining significantly during 5MCY16 (down 32%YoY), fertilizer offtake rose 28%YoY during June‐November 2016. According to latest figures released by NFDC for November'16, total fertilizer sales increased to 1.58 million tons against 1.32 million tons sold in November'15, up 20%YoY/68%MoM). Urea sales increased to 764,000 tons during November'16, up 23%YoY. On a cumulative basis, total fertilizer sales posted a growth of 3%YoY to 7.83 million tons during 11MCY16, whereas urea offtake was 4.59 million tons (down 4%YoY). On arrival of Rabi season, DAP sales continue to show great strength in November'16, registering an increase of 17%YoY/32%MoM to 631,000 tons, of which imported DAP sale was 421,000 tons (up 10%YoY/61%MoM). Near‐term factors affecting fertilizer industry are: 1) Rabi season to continue driving demand, 2) favorable ruling from SHC against GIDC imposition, 3) international pricing dynamics (urea prices rebounded to US$235/ton in December’16 and 4) decision on export of excess urea inventory.

Latest banking sector data for November'16 indicates that banks' balance sheet (BS) continues to grow at strong levels by 9%YoY to Rs12.3 trillion. With banks lowering their preference for risk‐ free GoP securities (investments down 9% since June'16, private sector credit growth picked up pace, posting an encouraging growth of 11.7%YoY during November’16. Consumer financing grew by a healthy 20.%YoY (10.3% of the private sector loans) as banks look to re‐focus on high margin auto finance and personal loans in the current lower inflationary environment. Expecting spreads to bottom out this year as interest rates rise next year, analysts retain their liking for banks due to: 1) the room to benefit from loan growth, 2) an adequate CAR buffer, 3) achieved economies of scale and 4) a strong non‐interest income franchise. Playing this theme, we like HBL and UBL however, post price‐bull run over the last 6 months.

According to provisional data, cement dispatches during December'16 declined by 0.8%YoY/8.9%MoM to 3.414 million tons. Weaker domestic demand growth during December'16 could be attributed to seasonal slowdown in construction activity and decline in PSDP expenditures in December'16. Exports also declined, likely due to the seasonality factor. While industry's dispatches growth remained dismal, CHCC dispatches were up to 119,000 tons in December'16, indicating the commencement of its 1.32 million tpa Brownfield expansion during the month. On a cumulative basis, industry's dispatches grew by 7.9%YoY in 6MFY17 as compared to 9.9% in 5MFY17 due to recent month's decline in dispatches. Seasonal slowdown in winters may keep dispatches growth rate lower, where we expect domestic demand growth to pick up ahead of summers as construction activity and PSDP releases increase.

US shale producers to gulp Saudi market share of oil

After OPEC lead by Saudi Arabia and Russia arrived at a consensus to contain oil production, I wrote that the real threat for Saudi Arabia was not Iran but the US shale producers. Some of my critics said that I suffer from US-phobia and try to portray whatever happens on the earth as part of US conspiracy.

This morning when I read a news from Reuters about increasing number of rig counts in the US, it gave me a feeling that I was not mislead by the western media but right in saying that with the hike in crude oil price, rig count in the US would jump dramatically.

According to the Baker Hughes, US energy companies have added oil rigs for an eighth week in a row as crude oil prices rose to a 17-month high. During the week ended 23^rd December 2016 the total rig count went up to 523, the most since December 2015.

The report also said that by May this year rig count had plunged to 316, from a record high of 1,609 in October 2014. This decline could be attributed to crude oil price that plunged to US$26/barrel in February 2016 from US$107/barrel in June 2014.

The report also indicated that oil and gas rigs count would average above 500 in 2016, around 750 in 2017 and above 900 in 2018. This confirms the news that while other oil producing countries curtailed fresh investment, US shale producers continued production without filing bankruptcy under Chapter 11.

The Reuters news should be an eye opener for oil producing countries, particularly Saudi Arabia, Iran and Iraq. They should not be the first to cut production and let the crude oil price go up. If they want to keep US shale producers under pressure, they will have to keep crude oil price below US$35/barrel. This may be pains taking but the only option to bring down the number of active rigs in the US. They should also keep an eye on E&P companies filing bankruptcy under Chapter 11.

In response to this I have received following response from Mark S. Christian, ​President, Chris Well Consulting.

I read your article, "US Shale Producers to Gulp Saudi Market Share of Oil". This article implies a skyrocketing North American rig count, but the U.S. did not add 523 rigs during the week ending December 23, 2016. In fact, the rig count in the U.S. is growing only modestly at the moment. Last week the U.S. added only 16 rigs in total - 13 rigs exploring for oil, and 3 rigs exploring for natural gas. This brings the total rig count to 523, but your article implied 523 rigs were added during this past week, and that is not correct. Maybe it was an editorial mistake by the publisher - which said: "During the week ended December 23, 2016 the total rig count went up by 523, the most since December 2015".It should have said ..."the total rig count went up to 523", implying the aggregate total reached this number.

I have been in the well-servicing business for more than 30 years and during this time operated workover rigs.​ A well service company provides well completion and maintenance services and​ demand for rigs go up and down with the oil price. When the oil price recently fell below $30USD/Bbl - my​ workover rigs were sitting idle. Oil companies could not afford to work on their wells, so they let them go offline. As prices moved above $45/Bbl, oil companies started calling again - and our workover rigs slowly began moving back into the field. The same holds true for American drilling rigs. Higher prices = higher U.S. rig utilization.

This supports your hypothesis that - 1) the U.S. rig count is a threat to the Saudi-led production cuts and 2) American shale may be a longer term threat to OPEC's market position.  Your warning to Iraq, Iran, and Saudi that raising prices via production cuts is not in their long-term interest, is correct, although I surely hope they do not change course.

Saudi guided OPEC into underestimating the staying power of shale-focused oil companies in the United States who were built on junk bonds and high-interest debt. Most were developing fields that were not economic below $60/bbl - and the Saudi's knew this. Riyadh miscalculated by expecting these financially weak companies to fold up quickly once prices fell below lifting costs. That did not happen, many went into Chapter 11 bankruptcy which allowed them to discharge their bond debt and emerge with a cleaner balance sheet.

El Naimi expected very steep decline curves for U.S. shale production, however, this did not materialize and North American shale production turned out to be more resilient than even the American oil companies forecasted. El Naimi also expected the shale market to collapse on itself as he viewed U.S. shale production to be inefficient. It was - until market forces went to work and held the unconventional resource market together much longer than the Kingdom's cash reserves or El Naimi's ideas were able to bear. 

In November 2014, the bottom fell out of the US oil market and caused U.S. service costs to deflate - my rig rates fell 30% in 60 days. What most outside the U.S. don't understand about the American market is when things are good we can ramp up drilling and well completion quickly​, but when things turn bad - cost cutting and a lazer-focus on efficiency enable us to sacrifice profits and survive until the market rebounds.

El Naimi's low-price strategy forced American E&P's to cut wasteful spending and exercise more discipline over their profit and loss. This helped​ U.S. production become more efficient - and lowered U.S. lifting costs. Now fields that were unprofitable when crude prices fell below $60/bbl are profitable at $45/bbl.

The big question that everyone wants to know, (and relate directly to your warnings to OPEC in your recent article) is: How long will it take the​ U.S. to ramp up production enough to offset OPEC's production cuts? Can American production actually grow large enough to begin driving global oil prices down? If that happens, OPEC will no longer be the swing producer we have relied on for so many years to correct bubbles in the market.

If the U.S adds 16 rigs per week over the next 52 weeks - the resulting increase of 832 new rigs in the next year will not affect America's oil production to an extent it will make a noticeable change to the global oil market. Over the years I have noticed that the U.S. market needs 2-3 years of booming exploration and development activity before the global market takes notice. I do agree with your assumption that production growth in the U.S. may swallow up Saudi's recent production cuts, but it will take 24-36 months before many people take notice.

US troops to stay in Afghanistan forever

I started writing blogs under Geo politics in South Asia and MENA about five years back. The objective was to share my views with global readers, particularly the Think Tanks operating in the US. Most of the topics I picked up over the years were: 1) proxy wars in Afghanistan, Iraq and Syria, 2) imposition of economic sanctions on Iran for decades, 3) use of crude oil as weapon, 4) melodramas in the name of change of regime, 5) creations of phantoms like Taliban, Al Qaeda and ISIS and 6) dishonest western media.

The title of one of my second blog written in August 2012 was Will US pull troops out of Afghanistan? Despite having little knowledge about international relations or geopolitics at that time, my conclusion was that the US will never pull its troops out of Afghanistan. My conclusion was based on the fact that presence of the US troops in Afghanistan provides it a safe haven for undertaking cross border actions in Pakistan, Iran, China and some of the energy rich Central Asian countries.

I had deliberately avoided mentioning drug as one of the prime reasons for the US troops for occupying Afghanistan, but one of the readers of my blog was prompt in raising this point. If one thinks with a cool head this may be the key reason because it gives control on drug trade and also the money to be paid to militants for killing the innocents ruthlessly and to keep the world permanently under fear. It may also be said that Afghanistan has become a nursery for growing mercenaries and people from around the world get training in the rugged mountains of Afghanistan. They are also paid from the money earned from cultivation of poppy.

Having born and grown in war-ridden Afghanistan, the locals have become ‘blood thirsty’ and suffer from restlessness unless they kill a few people every day. Ironically they not only kill their own countrymen but also go to places where conflicts have been created by the super powers to satisfy their lust.

The conclusion of my today’s blog is that after fighting two world wars, super power have decided to fight proxy wars, sell arms to the governments where rebel groups have been created by them, use income from drugs and oil for buying arms. The job becomes easier through propagation of regime change mantra.

These super powers are among the sponsors of the UN, created for restoring peace in the world. However, now the only role of Security Council is to grant permission for attacking a country chosen for the proxy war. Two of the worst examples are Afghanistan and Iraq and many other countries are also the victim of super powers. Usually the military dictators are made head of state and often the drama of sham democracy is also staged.

Pakistan stock market witnesses decline in volume traded

In a long due correction, Pakistan Stock Exchange (PSX) took a breather during the week ended 23^rd December 2016. The benchmark index closed flat at 46,634 levels. Key event for the week was completion of bidding process for the sale of 40% shares of PSX, where Chinese‐led consortium emerged as the highest bidder with Rs28/share. Volumes dipped during the week with average daily turnover at 336.6 million shares, down by 5.8%WoW.

Major news flows during the week were: 1) Prime Minister Nawaz Sharif brought five key regulatory bodies including OGRA and NEPRA under the administrative control of relevant divisions/ministries, 2) Current Account Deficit for November’16 rising to a hefty US$839 million as compared to US$381 million in October’16, taking 5MFY17 deficit to US$2.6 billion, up 91%YoY, 3) GoP raised Rs149.9 billion in MTB auction where cut off yields for 3 and 6 month moved up, 4) PSMC confirmed plans to launch the standard model of Suzuki Celerio in March’17 that will replace it Cultus model, 5) Competition Appellate Tribunal has dismissed an appeal filed by HASCOL to prevent PSO from acquiring SHEL’s shares in Pakistan Refinery and 6) NEPRA granted power generation license to Maple Leaf Power Limited, clearing the way for setting up an imported coal‐fired plant of 40MW at an estimated cost of Rs5.5 billion. Market leaders for the week were: HMB, EPCL, AICL, PSMC and ABL. Laggards during the week were: MEBL, LOTCHEM, SSGC, HASCOL and ASTL. Foreign participation continued its negative trend with US$45.5 million outflows compared to US$46.7 million in the last week.

The market is likely to largely continue its positive trend over the near term, however room for volatility in the next week remains where risks could emerge in the form of: 1) any swing international oil price on potential concerns on rising US inventories and 2) and political developments gaining prominence. Possible announcement of anticipated exports incentive policy in the near term remains a key trigger for price performance in the textile sector.

Shifting of policy stances (gas price curtailment, privatizations), incidence of higher taxation (super tax continuation, real‐estate) and sector specific packages (auto policy, incentives for textile exports) add up to a 'hit‐or‐miss' policy environment for domestic industry. Sectors bearing the brunt of policy actions include: 1) Textiles through zero‐status scheme granted to all export‐oriented sectors and accompanying DLTL and ERF incentives, 2) Autos from the introduction of AIDP‐II and accompanying incentives shifting long term competitive dynamics in the sector, 3) Fertilizer on support from GST reduction, cash subsidies and reduced feedstock prices in April’16, and 4) Cements, as they faced higher FED, difficulty in approval for coal expansions and blowback from real estate taxes. For CY17, analysts expect regulation pertaining to export competitiveness to continue, while expansion projects with FDI elements (foreign ownership) to continue remaining in favor. Moreover, as election year approaches, targeted subsidies for agri‐linked sectors, consumer cyclical (Autos, Consumer Goods) from widely accepted populist policies, are expected to gain steam.

Balance of payment metrics in November'16 has remained unimpressive. While exports for the month marked slight recovery with 6.2% sequential rise, they remain flat on YoY basis which coupled with 6.0%MoM/10.8%YoY rise in imports has pushed the trade deficit 10.5% MoM/14.3%YoY higher. While remittances improved 3.3%YoY for the month to US$1.61 billion, dip in flows from GCC region at 0.8%YoY still remains a concern. Foreign investment inflows netted at US$87.2 million in November'16, down 41%YoY, where FDI stood at US$143.7 million (down 37% YoY) as inflows from China have been slow this fiscal year (China's share in 5MFY17 down to 34% from 45% as compared during the same period last year). Going forward, Balance of Payment trends are expected to worsen; with little room for fast paced recovery in exports. Analysts see FY17 trade deficit expanding by 14%YoY which coupled with flattish remittance flows should keep the deficit high.

Chinese consortium submits highest bid to acquire 40 percent shares of Pakistan Stock Exchange

The consortium consisting of China Futures Exchange, Shanghai Stock Exchange, Shenzhen Stock Exchange, Pak-China Investment Company (PCIC) and Habib Bank (HBL) have reportedly submitted the highest bid of PkR28/share for the 40% strategic stake (321 million shares) of the Pakistan Stock Exchange (PSX). In the consortium, China Futures Exchange, Shanghai Stock Exchange and Shenzhen Stock Exchange would be allotted an aggregate stake of 30% while PCIC and HBL would each be allotted 5% of the strategic stake post regulatory approvals.

At the onset, this should be positive for the Pakistan market as it should enhance the brokers’ capacity to trade (opportunity to enhance net capital balance). In this regard, the transaction should result in an inflow of PkR 8.9 billion  (US$86 million) for around 200 owners of the PSX. Leading Brokerage house, AKD Securities believes that cash proceeds from this transaction can take up to two months to move out of the escrow account.

Other benefits to accrue in the medium to long term include: 1) increase in investor base, 2) up-gradation of technological infrastructure / technology transfer, 3) liquidity inflow from the launch of new products and 4) cross listings and market access for Pakistani companies.

Analysts remain positive on the Pakistan market as the current 21% valuation discount to MSCI Asia Pacific ex-Japan Index is expected to narrow on the back of enhanced liquidity present in the market coupled with formal inclusion in the EM space in 2017 and improving growth rates.

Pakistan textile sector performance far from satisfactory

In continuation of the previous month's positive performance, external trade shows improvement in November 2016 exports amounting to US$1.76 billion, exhibiting reversal from the consistent monthly downward trend seen this year. Textiles and clothing sector, which constitutes more than 60% of country's exports also picked pace, rising 9.7%YoY to US$1.05 billion during the month under review. This growth was broad-based recovery in both low value (+15.6%YoY) and value-added segments (+7.6%YoY). However, on a cumulative basis, 5MFY17 textile exports were still lower at US$5.13 billion.

Going forward, analysts expect textile exports to largely remain under pressure due to: 1) demand side bottlenecks with weak Chinese demand outlook and economic slowdown in the EU following Brexit, 2) lower currency competitiveness amid sharp depreciation in regional currencies and 3) low commodity prices. That said, sector anxiously await yet to be announced incentive package estimated around Rs75 billion by the Government of Pakistan (GoP). This aimed at enhancing export competitiveness over regional countries and providing relief to the textile sector. Moreover, encouraging cotton arrivals to date for MY17 (up 12.33%YoY to 10.14 million bales) is expected to reduce cotton shortfall next year.

Performance of the value added sector posted growth with Knitwear, Readymade garments and Bedwear registering double digit growth. Moreover, the low valued added segment depicted commendable recovery after a consistent decline this year, where exports of cotton yarn increased by 42.1%YoY/10.3%MoM. However, on a cumulative basis, textile exports after recovery still remain unimpressive with 5MFY17 exports recording a decline of 2.0%YoY.

According to the fortnightly cotton arrivals report of PCGA, a total of 10.14 million bales arrived in the country by Mid December this year as against 9.03 million bales last year, up 12.33%YoY. Arrivals from Punjab increased by 19.38%YoY to 6.44 million bales, while flows from Sindh increased marginally by 1.86%YoY to 3.70 million. Initially the GoP had fixed the target of cotton for MY17 around 14 million bales, which was later slashed to less than 11 million bales. In an attempt to ensure ample availability of cotton in the country, the GoP has also lifted ban on cotton from India.

Going forward, any substantial increase in the export of textiles and clothing seems unlikely amid emerging: 1) concerns on low currency competitiveness following sharp decline in regional currencies, 2) risk of potential decline in exports to European Union post Brexist and 3) sluggish Chinese demand. The added irritants are disruption in supply of electricity and gas despite high tariffs. Ministry of Textiles, Ministry of Commerce and Trade Development Authority of Pakistan (TDAP) seems to have gone into complete hibernation.

What are the motives behind alleging Russia of hacking US election?

In one of my recent posts I have stated that elections are engineered in third world countries but in the US election is engineered in an organized manner. After the victory of Donald Trump a debate has started in the US that Russia has hacked election. Accepting all my inadequacies the following points come to my mind. I request my reads, especially the think tanks from the United States and those in power in Russia to help the world in understanding the purpose behind this propaganda.

My first question is, has Russia attained power to rig election of a country that has defeated USSR in Afghanistan, which led to disintegration of the then second largest super power?

My second question, what is the motive behind this propaganda?

My third question, what are the motive behind maligning Russia or CIA and NSA?

My fourth question, why entry of Donald in White House is being denied?

My fifth question, who is the bigger war monger, Donald or mighty CIA, NSA and Pentagon?

My sixth question, is the media in the US also subservient to military might?

As I have accepted earlier my inadequacies, kindly have some patience to read my replies also.

My explanation to the first question is that there is a clear motive behind accusing Russia, killing two birds with the same stone. While the effort is aimed at maligning Russia, it is also exposing failures of CIA and NSA. I will abstain from raising finger at Russia, but tend to agree with those who have been saying that CIA/NSA and Pentagon have been acting on false information, the worst being presence of weapons of mass destruction in Iraq.

The reply to my second question may sound outrageous but I could not resist from saying it. Despite all the propaganda against Donald, Hillary lost the election. This is a defeat of those who could be termed non-state actors, the Zionists. May be they believe that establishing a link between Donald and Russia could stop his entry into the White House.

The reply to third question is that lately Russia has defeated the US on various fronts, specifically in Syria. This has happened despite the best efforts and tall claims of CIA and NSA. Those believing in maintaining status quo are not ready to accept their defeat. However, while accusing Russia they forget that they are also accepting failure of their intelligence agencies. In my views they are accepting the supremacy of Russia to seek more funds for CIA and NSA for their capacity building to open new war fronts around the globe, the next front is South China Sea.

The possible explanation of fourth question is the apprehension that Donald’s cordial relationship with Russia may lead to withdrawal of support for ISIS and closing of the front in Syria. This is being taken as a victory of Iran, which the Zionists don’t approve. Ironically, US military might, intelligence and ‘embedded journalists’, who have been counting days of Syrian President are not ready to accept their defeat.

To find reply to fifth question readers have to read my latest post, US war mania. Over the years I have been saying that US is the biggest arms supplier and to increase sale of arms it has to create new rebel groups, provide them funds and training to sell arms to the incumbent governments of these countries. Contrary to the impression created by dishonest western media, I have a feeling that Donald wishes to focus more on domestic issues, spend more funds on creation and improvisation of infrastructure for the benefit of masses rather than spending billions of dollars of taxpayers’ money on proxy wars. This policy of Donald is not approved by war mongers and owners of the armament factories of the US.

Lesson of the story is that the US citizens are so engrossed in ‘other’ activities that they even don’t have time to question why tax payers’ money is being spent on wars rather than on millions of US citizens still living below the poverty line. Groups having vested interest have been preaching ‘change of regime’ in countries around the world must also do the same at home.  

US war mania

Today Facebook reminded me that on 17th December 2011, I posted a question: do you believe that after taking an exit from Iraq, USA is trying to open new fronts? I also apprehended that some of the potential targets among Muslim countries could be Iran, Pakistan and Saudi Arabia. I also asked the readers: does my assertions carry any weight?

When I posted this question about five years back, I didn't have good knowledge of geopolitics in South Asia and MENA. If I look at 5-year history now, ongoing war in Syria and changed relationship of US with Saudi Arabia show that the world’s super power wants to keep war ongoing in this region. The US has not attacked Saudi Arabia but has caused it huge economic losses by bringing down crude oil price per barrel to less than US$35 from US$ 147. Even at present price is hovering around US$ 50 because of Saudi Arab led OPEC effort to cut output but US is taking full advantage of the prevailing situation.

If one looks at the US mania to topple Syrian President Assad, the only conclusion that could be drawn is US war mania. The history also shows that the US initiated war in various countries; an example of distant past is Vietnam and recent past are Afghanistan and Iraq. The irony is that the US never accepts its defeat and never declares that war is over. It continues to support various rebel groups in war-torn countries and the most notorious examples are Afghanistan, Iraq, Syria and Libya.

One may wonder, why should the US initiate war? My reply is simple, it has to sell its arms and to conclude huge transactions first it creates rebel groups and then sells arms to the incumbent groups. The most notorious groups of present time supported by the US are Taliban and ISIS; other groups may also be working in different countries.

Kindly allow be to refer to Saudi Arabia that lately emerged as the biggest buyer of arms in the recent past. The US supported it by taking price of crude oil to US$147/barrel. In the meantime the US also increased its rig count to above 1900 to attain self sufficiency in indigenous crude production.  To the viability of indigenous producers, the US funds plunged crude price to US$35/barrel.

The US not only caused huge economic losses to Saudi Arabia but has lately withheld supply of arms on the please that these are being used in Yemen. I may laugh at the US acts because over the years it was fully aware that arms were being used by Saudi Arabia in Yemen. It concluded the deals, took the money and now not honoring its commitments.

Pakistan stock market witnesses bullish trend despite selling by foreigners

Pakistan Stock Exchange (PSX) continued its upward move during the week ended 16^th December 2016. This bullish performance was led by calming political uncertainty over Panama paper and strong oil prices post Saudi Arab led deal, resulting in higher crude oil prices. This propelled gains in the index heavy Oil & Gas sector. However, activity at the bourse tapered 9%WoW with average daily volume at 357.6 million shares and volume leaders being second tier scrips like PIBTL, ASL, BOP, TRG and EPCL.

Key news flows during the week included: 1) US Fed increased interest by 25bps to and also hinted towards further increase in next calendar year, 2) a Chinese firm showed interest in participating Nishat Energy Limited (NEL) plan of setting up a 660MW power plant on imported coal, 3) ECC of the cabinet reversed its earlier decision to reduce the gas sale price for industrial sector to Rs400/mmbtu. However, it approved reduction in price for power stations and IPPs from Rs613/mmbtu to Rs400/mmbtu, 4) PSMC linked its US$460 million investment in a new Greenfield project with a steep cut in import duties and 5) Fecto cement decided to participate in bidding for Dewan Cement.

Performance leaders during the week were: POL, PPL, MEBL and SNGP; while laggards included:  AGTL, FATIMA, FFBL and LUCK. Foreigners remained net sellers for the week, where outflows stood higher at US$46.8 million as compared to US$24.8 million last week.

Oil stocks will likely remain in limelight, following the OPEC and Non‐OPEC members’ decision to cut output and manage supply. Moreover, expected announcement of the textile policy next week will keep the sector in focus. On the political front, easing noise after Supreme Courts adjournment of Panama Leaks case hearing till January’16 is likely to remain positive for the market.

Beating expectations of analysts, Habib Bank (HBL) posted hefty increase in 3QCY16 earnings of 40%QoQ took 9MCY16 earnings to Rs17.47/share. The focal point was improvement in asset quality that came under considerable stress following the slowdown in GCC economies in CY15 raising concerns on further infection of its international exposure. However, with provisions going down by a substantial 67%YoY in 9MCY16 on the back of Rs336 million reversal in 3QCY16 (first after 2QCY14), analysts are now more optimistic on the bank's asset quality metrics. HBL's price performance has been driven by a confluence of factors such as: 1) Pakistan's inclusion into MSCI EM space, 2) interest rate cycle reversal drawing close and 3) a resilient earnings profile.

Recently released data by Pakistan Automotive Manufacturers Association (PAMA), Pakistan's total industry sales for November'16 grew by almost 12%MoM to 17,858 units, still below 19,029 units sold in November'15 – thanks to unchecked import of used cars. Car and LCV sales rose to 16,018 and 1,840 units respectively, up 10.8/19.9%MoM but down 2.9%/36%YoY pointing to the continued influence of the Rozgar scheme on industry sales growth. Taken as a whole, 11MCY16 sales showed a tepid decline of 9% YoY to 187,591 units sold under all segments. Cars/Tractors posted minor falls of 2.9/3.0%YoY to 163,339/39,170 units sold over 11MCY16, while LCV sales dipped 36%YoY to 24,252units. Three major OEMs remained within their seasonal trends, where HCAR was an outlier, with sales growth of 3.2%MoM/103.3%YoY (unit sales of 3,096units during November'16) driven by the new Civic. Additionally segment‐wise growth showcases a burgeoning demand side scenario for the 1000CC segment where cumulative sales for 11MCY16 were 26,128units up 28%YoY, while the 1,300CC and above segment sales of 84,769units experienced a slowdown, recording growth of 3%YoY as against 40%YoY growth experienced in the same period last year. 800 and below 1000cc segment experienced a decline of 20%YoY selling 52,442units during the period. Citing the launch of Revo/Fortuner variants, followed by resilience of the Corolla, superior operations and hedging of currency risk (60% localization, active hedging of order book).

In line with the broader textile sector that has been in limelight on account of the 1) upcoming textile policy, 2) inclusion in the zero‐rated tax regime and 3) implementation of new efficient refund mechanism, Nishat Mills (NML) remained in focus. Pakistan’s leading brokerage house, AKD Securities has lowered the portfolio discount to 40% (from 50%) on the back of improved trading volumes and betas of portfolio companies that face lower volatility, while improving the liquidity of NML's portfolio. The earnings profile remains encouraging with earnings growth of 26%YoY in FY16. Going forward, brokerage house expect profitability to remain strong that includes 22%YoY growth in FY17 underpinned by: 1) marked improvement in core operations on expected improvement in gross margin on account of improved production efficiencies and grant of zero‐rated regime, along with 2% growth in topline and 2) substantial growth in dividend income (up 12%YoY) on expectation of continuation of strong dividend payouts by associate companies.

A wake up call for ruling junta of Pakistan

Pakistan has an agro-based economy and the country is heavily dependent on imported energy products. As country’s trade deficit is mounting there is need to revisit government policies. The other alarming factors are: 1) extensive borrowing to meet the budget deficit and 2) deceleration in remittances. The added problem is that with the commencement of winter industrial units, particularly textiles units are likely to be a major sufferer and exports of textiles and clothing destined to plunge.

As stated earlier, Pakistan is heavily dependent on imported energy products; any hike in crude oil prices does not bode well for the country, though capital market analysts term the hike good for E&P and downstream companies listed at Pakistan Stock Exchange (PSX). A stronger dollar is likely to keep commodity prices in check, but also expected to make imported commodities more expensive.

Pakistan Steel is closed for months and there are no signs of its commencing production in the near future. Its price has posted 16.4%MoM increase in November, as Chinese producers re-align supply and the government implements a policy of curtailing supply.  This is likely to cause further hike in steel price, which does not bode well for Pakistan

Pakistan is a major user of coal, in cement industry. Coal price drop on Chinese relaxation on mining controls: After reaching a 5-year high, coal price has fallen to US$83.5/ton as the government asked the coal miners to lift up output till the end of end of winter heating season to counter the surging price. The coal price decline has remained slower as the Chinese coal producers were unable to ramp up production quickly due to medium-to-long term supply contracts and time to bring back coal mines into production. Nonetheless, normalizing of seasonal demand post-winters, will likely witness further fall in coal price as China will continue its policy to do away with coal based energy.

Fertilizer is one of the major industries of Pakistan and currently suffers from poor capacity utilization. Added to this is, extremely low international prices of urea, affecting the earnings of local manufacturers. In November its prices rose to US$224/tons as compared to US$201/tons a month ago.  While continuing to recover from lows of US$172/ton seen in July 2015, urea prices remain down 8%YoY as oversupply and weak demand continue. On the domestic front, recovery in international prices is likely to enhance pricing power of local manufacturers, who are already plagued by lower off-take. However, further recovery in off-take remains more likely to be a product of price reduction.

Global cotton prices during November remained higher as compared to last year (up 14%YoY) on the back of continued price recovery. The monthly USDA report featured an increase in global annual production up to 103.3 million bales and virtually no change to world mill-use, resulting in additions to global stocks. Following the global trend, prices in the domestic market remained on the higher side in November. Despite higher-than-expected phutti arrivals, prices of quality cotton move higher because of sustained buying by mills and spinners. Moreover, temporary ban on cotton import from India kept demand of local cotton robust.

This year Pakistan is likely get another bumper crop of wheat but of no benefit. While the surplus can’t be exported, post harvest losses are feared to increase due to inadequate storage facilities. Lack of supporting policies has failed in attracting investors to construct modern warehouses and collateral management companies. Absence of modern silos results in up to 20 percent post harvest losses. Saving this could boost income of farmers and also bring down price of staple grain n the country.

Curtailing oil production ‘an agreement of thugs to rip off consumers’

Without mincing my words I will prefer to call recent agreement of OPEC and non-OPEC members to cut output ‘an agreement of thugs to rip off consumers’. They have agreed to cut output but still don’t trust each other. They even go to the extent of calling each other ‘cheater’. Therefore, some of the members are most likely not to abide any production limited. The business will continue as usual because consumption of energy consumption will increase with the commencement of winter. However, the level of consumption will remain dependent on the drop of mercury level.

Let me explain my assertion that the US and Saudi Arabia were partners in taking oil prices up to US$147/barrel. In fact Saudi Arabia fell in the trap because it was overwhelmed by the hike in price. Although, I fell that I am not competent enough to say this, but just can’t resist from saying. Saudi Arabia just did not bother to look at the number of rigs operating, which exceeded 1900 at one time. The quantum increase in US Shale output helped the country (US) in becoming self sufficient in indigenous oil production. The US is no longer dependent on imported oil, though it is still importing low cost oil from Saudi Arabia.

In my previous blogs I have discussed different themes that included 1) pressure on Iran to cut output 2) Saudi Arabia asked to make the biggest cut? 3) Iran not a threat to Saudi Arabia but US Shale, certainly 4) attempts to penalize Iran and Russia have backfired. The scenario prevailing since 2014 can be summed up in one sentence, ‘Saudi Arabia kept on pumping maximum oil to maintain its market share. It may have succeeded in maintaining the share but petro income nosed dived, leading to extensive borrowing.

After the withdrawal of sanction imposed on Iran, Saudi Arabia felt jittery and feared losing its substantial market share. It completely ignored another harsh reality that due to over three decades of economic sanction, Iran’s output could not be increased. Though, economic sanctions were also imposed on Russia, it managed to take its output above 11 million barrels lately. That is the reason it convinced Saudi Arabia to agree to cut output because it believes that collectively two countries (Russia and Saudi Arabia) now enjoys power to maneuver oil price. Both of them want to ensure that Shale production does not increase certain level.

I will also say that geopolitics play a key role in the supply of oil. Some of the most obvious examples are Nigeria, Libya and Iraq. As and when a reduction is desired, output in these countries is disturbed. This time the issue of pipeline in the US has also affected shale output.  Therefore, the readers may also agree with me that oil output and its prices are controlled by a few thugs; they may appear foes but have common agenda, keep the world under their control.

Pakistan stock market benchmark Index inching towards 46,000

Continuing its strong run, the benchmark of Pakistan Stock Exchange marked another stellar week ended on 8^th December 2016 and closed at 45,387 levels. The rally was driven by high oil prices, continued expansions in industrial sectors and announcements of corporate actions. LUCK announced plans for entry into automotive business through setting up manufacturing plant in partnership with Kia motors, furthering operations in Iraq while expressing intention to bid for DCL's assets, keeping sentiment strong. Other announcements included TREET and ICI’s plans to invest in the pharmaceutical sector, Shanghai Electric sharing a US$9 billion investment plan following KEL’s acquisition and BoD approval of MCB and NIB merger. Additional key news flows included: 1) Continuation of Supreme Court hearings of Panama case, with PM Sharif facing criticism from the court for failing to provide a money trail for asset purchases, 2) GoP raising Rs147 billion through Treasury Bills auctions where cut‐off yields remained stable, 3) cotton arrivals increasing 13.8%YoY for the season, 4) delay in bid opening process for the 40% divestment of PSX and 5) CCP imposing a penalty of Rs150 million on PSO for deceptive marketing. Market leaders during the week were: LUCK, ICI, PIOC, FCCL and AICL; while laggards were: ASTL, EPCL, HASCOL, PSMC and LOTCHEM. However, activity at the Exchange tapered 15.3%WoW with average daily trading volume of about 393 shares. Foreigners remained net sellers for the week, though outflows stood lower at US$24.8 million as compared to US$33.5 million a week ago. Oil stocks is likely remain in limelight as the next week kicks off, following the OPEC and Non‐OPEC meeting to decide on oil output cuts set for tomorrow. Moreover, the US FOMC is scheduled to announce monetary policy next week, with broader anticipations of a 25bps hike in Federal Funds Target Rate (FFTR). However, Fed’s outlook for FFTR trajectory in CY17 remains a risk event for global markets. Resurgence in political noise on Panama case developments remains a possibility, to potentially force some profit taking next week.

The US FOMC is largely anticipated to increase the fed rate in its upcoming monetary review next week  that coupled with a surge in inflationary expectations post Trump victory has pushed the greenback to its 14-year high. Within this context, the upcoming meeting retains particular importance as Fed's economic projection for future rate trajectory can alter the dollar outlook. While most regional currencies have witnessed erosion against US$, the PkR/US$ parity has held its ground. Moreover, GoP's ongoing drive to normalize kerb‐rates is a strong signal of its policy to maintain currency stability. However, going forward analysts fear some decline due to: 1) exports weakness amid lower currency competitiveness in the region, 2) higher oil prices adding to import bill and 3) potential delays in foreign debt flows to support foreign exchange reserves.

We revisit our investment case of LUCK as it has formally announced to further expand its business portfolio. The new list of projects comprise of: 1) setting up of manufacturing plant of Kia motor vehicles, 2) expressing interest in acquiring DCL's 1.134 million tpa Hattar plant, 3) doubling capacity of Iraq JV to 1.742 million tpa and 4) indirect additional exposure in the pharmaceutical business through its subsidiary, ICI (expressed interest in acquiring certain assets of Wyeth Pakistan Ltd). Assuming the DCL acquisition is successful, LUCK's earnings can increase depending on DCL's post acquisition performance. Whereas, doubling Iraq JV's capacity can result in incremental earnings.

Up-gradation of prevailing MOGAS standard (from 87RON to 92RON) and the accompanying launch of high octane variants by OMC's has rejuvenated the drive for volumetric sales growth, as seen in the November’16 figures released by OCAC. Running a preliminary market sizing analysis, some analysts ascertained the impact of these fuels (reportedly deregulated but an official notification is still awaited) on SHELL, HASCOL and PSO's earnings. Moreover, deregulation resonates positives for OMC's, namely: 1) additional cushion against wild swings in cost of supply, as increased costs can be passed on without a lag and higher margins raise earnings profile and 2) low receivables in motor fuels segment, increasing avenues for growth steering clear of liquidity pangs.

Pakistan Stock Exchange closes above 43,000 levels

Delivering persistent returns despite the recent spate of foreign selling (outflow of US$125.7 million since November'16), the benchmark Index of Pakistan Stock Exchange grew 0.63%WoW, gaining 271pts closing at 43,271 points. Supported by OPEC's decision to restrict crude output and resulting movement in global benchmarks (Brent/WTI gained 11.8/8.4%WoW), upstream Oil & Gas climbed higher.

Key news flows during the week were: 1) CPI for November’16 was reported at 3.81%YoY compared to 4.21%YoY in October'16, implying sequential increase of 0.21%MoM, 2) deregulation of 95 and 97RON MOGAS affirmed by Minister stating that 92RON would replace the 87RON previously being supplied, 3) Finance Minister announcing increase in price of petrol and diesel, 4) GoP releasing Rs248.1 billion for various development projects under public sector development program (PSDP) under the current financial year as against a total allocation of Rs800 billion during the previous year and 5) Pakistan Stock Exchange (PSX) scheduled to open bids on Monday, December 5, 2016 submitted by foreign strategic investors and local institutions to for acquiring 40 percent stake of the bourse. Key gainers at the bourse during the week were: EPCL, MTL, ICI and ENGRO, whereas laggards were: NCL, NML and HCAR. Average traded volumes were highest for: BOP, PACE, ASL and WTL. Approaching end of the year holiday season, foreign participation is expected to take a back seat as local funds and institutional investors, favoring blue‐chip plays offering value. Rise in local oil prices have further fueled expectations of a bottoming out of the monetary atmosphere keeping commercial banks in the spotlight.

Gaining 6.9%MoM in November'16, PSX‐100 index stood its ground in what was an eventful month for the world; while global equity markets struggled (MSCI EM/FM down 5%/2%MoM) on policy uncertainties post Donald Trump's election as US President. This was despite persistent foreign selling where outflow for the month rose to US$117.05 million ‐ the highest in CY16. While the entire main-board posted positive returns, Cements led the board returning 15.9%MoM (on anticipated strong growth in dispatches and reversal in coal prices after a short lived rally) followed by Textiles (+9.7%MoM due to anticipated pressure on local currency amid strengthening US$) and Chemicals (+8.0%MoM on reduction in gas prices for industries). Going into December'16, the market is likely to look towards the following, taking direction accordingly: 1) oil price trend in the light of OPEC's production cut agreement and the stance adopted by non‐OPEC producers following the decision, 2) FOMC meeting on December 13‐14 where any potential rate hike can continue prompting outflows and 3) on‐going Panama papers related hearing keeping political pressure intact.

To stimulate growth, news flows have disclosed that the ECC has approved a 33% reduction in gas prices exclusively for industries, bringing down prices to Rs400/mmbtu. As an official notification by OGRA is still pending, lack of clarity remains on the inclusion of certain heads in the concession to be availed. It is general understanding that the gas price reduction extends to general industries that utilize gas as a fuel source including Steel, Glass, Fertilizers (concession available on fuel stock only) and Textiles. While benefiting industries by and large, Fertilizers, the largest industrial consumer of gas, stand to benefit the most followed by Steels and Textiles. Cements, on the other hand, are likely to remain unaffected unless the concession is also extended to captive power generation‐ gas tariff for which is determined under a separate head. In this backdrop, while the Fertilizer sector might enjoy a short‐term rally, a weak demand outlook and depressed international pricing dynamics can continue restricting price performance.

Pakistan stock market continues upward move

Benchmark Index of Pakistan Stock Exchange continued its upward move and touched a high of 43,000 points for the week ended 25^th November 2016. The gain of 625 points (1.59%WoW) was primarily led by E&P companies (on the back of 4.25%WoW increase in crude oil price), cements (on receding coal prices and expectation of robust dispatches) and textiles (on expected announcement of incentive package for the industry).

Average daily traded volume inched up by 4%WoW to 475 million shares where volume leaders remained second tier scrips such as PACE, BOP, PIAA, SMBL and ANL. Leaders during the outgoing week included NCL, NML, HASCOL, ASTL and EPCL, while laggards included SSGC, MEBL, INDU, AKBL and HBL.

Following were the key developments during the week: 1) ECC approving reduction in gas prices for industrial consumers by Rs200/mmbtu, 2) PIA concluding a financing facility of US$130 million, 3) T‐bills yields in the recent auction remaining flat, 4) Pakistan securing an additional US$8.5 billion of investment from Beijing as part of the countries' joint energy, transport and infrastructure plan and 5) Summit Bank Limited announcing to initiate due diligence of Sindh Bank Limited for potential merger/acquisition.

The market is expected to remain volatile, taking direction from the following events in the upcoming week: 1) Panama case hearing scheduled on 29^th November, 2) Monetary policy Statement to be issued on 26^th and 3) OPEC’s meting by the end of this month to finalize output deal where inability of the producers to reach an agreement can keep Oil & Gas sector under pressure. Additionally, the recent trend of rising coal prices may keep cements under pressure while textiles are expected to remain in limelight upon expected announcement of the export incentive package.

After touching the year's high last month (4.2%YoY), CPI inflation is projected to revert back, coming in at 3.82%YoY during this month, implying a limited 0.21%MoM increase owing to muted rise in food inflation (0.2%MoM) and a high base effect. On the other hand, NFNE Core inflation is expected to inch up slightly to 5.3%YoY compared to 5.2%YoY in October this year. Consequently, 5MFY17 CPI/NFNE Core inflation average is expected at 3.91%YoY/4.87%YoY compared to 1.87%YoY/3.79%YoY in the corresponding periods last year. Inflation is expected to tread higher during the rest of the fiscal year, with projection for FY17 CPI inflation at 4.8%YoY, which eliminates room for further rate cut in the upcoming MPS. Moreover, rapid deterioration in current account strength (up 63%YoY in 4MFY17) and rising concerns on global front in the form of dollar and crude oil prices gaining strength are expected to keep the central bank cautious.

Inching up, current account deficit for October’16 was recorded at US$381 million as compared to US$174 million for September'16. Resultantly, 4MFY17 deficit accumulated to US$1.76 billion, higher than US$1.08 billion for the same period last year. The weakness has been led by slowdown in remittance flows and rapidly expanding trade deficit. Foreign investment dynamics have been unpromising so far in FY17, where FDI net inflows were reported at US$316 million ‐ half of US$610 million in 4MFY16. Relief has come in the form of the recent US$1.00 billion Sukuk issue, which has taken 4MFY17 total foreign investment to US$1.4 billion as compared to US$0.95 billion. Going forward, current account weakness is expected to continue where analysts reiterate their projection for deficit at 1.7% of GDP driven by trade deficit and slower remittance inflows.

Following below expected 3QCY16 earnings, AKD Securities revisited its investment case for national Bank of Pakistan (NBP), revising projected CY16/CY17 earnings down by 8.2%/7.6% on account of a higher than expected sequential downtrend in the bank's income streams, both funded and non‐ funded. While interest income was understandably lower on account of PIB maturities during the quarter, brokerage house has expressed its concerns regarding the decline in non‐interest income that was down 20%QoQ despite higher gains utilization. In this regard, fee income was down 28%QoQ followed by 34%QoQ decline in other income. While still appreciative of the bank's concerted efforts in improving its asset quality, higher provisions during the quarter were on account of changes in regulations on consumer financing by SBP (Rs783 million booked in this regard) along with seasonal impact of agri‐financing. Gaining 27%CYTD, the market has been quick in acknowledging the bank's fundamental turnaround. Valuation set is attractive and has room to expand once sentiments further improve on: 1) interest rate cycle reversal drawing close and 2) multiple re‐rating upon formal MSCI inclusion.

OGDC achieves record crude oil production per day

It is not a secret that Pakistan is highly deficient in indigenous energy products. Import of crude oil and POL products eats up billions of dollars every year. On top of that extensive gas and electricity load shedding keeps capacity utilization of industrial units below optimum capacity utilization. The prevailing situation demands accelerating activities of exploration and production (E&P) companies. Pakistan meets around 12 percent of its oil requirement from indigenous resources.

The state owned largest E&P, Oil & Gas Development Company (OGDC) claims it is making extra efforts and one tends to agree with the statement partially. Its latest announcement says that the Company has achieved a record production of 50,172 barrels per day (bpd) of crude oil. By international standard the number may look dismal but for Pakistan it looks enormous, 57 percent of the country’s total crude oil production estimated around 88,000 bpd.

The information disseminated indicates that the Company is all set to inject about 4,000 barrels of additional oil per day, 100 million cubic feet per day (mmcfd) of gas and 400 tons of liquefied petroleum gas, starting with fewer quantities in the first week of December and then gradually going up. This addition would come from Kunar Pasakhi Deep field in Sindh which had been held up due to disputes and court cases.

Pakistan inching towards acute shortage of POL products

I am a great fan of Dawn newspaper and Khaleeq Kiani. The story published on Monday Pakistan's fuel reserves fall below strategic levels highlights a few points. These include: 1) Prime Minister and Ministers don’t have time to focus on strategic issues of national importance, 2) they are also devoid of acumen required for strategic planning and 3) bureaucracy, picked up by politicians also tows the lines of their big bosses.

Knowing Khaleeq, I will not mince my words and say without hesitation that this story should have appeared much earlier. International price of crude oil took a nosedive in 2014 and since then has been hovering around less than USD50 per barrel. This provided an excellent opportunity to Pakistan to 1) construct additional storage facilities and 2) build strategic reserves. However, the policy planners and decision makers failed on both the fronts miserably.

Some time back I had posted a blog that a few refineries were busy in creating facilities to add their production and broaden product mix. Lately, I also posted a blog highlighting acute shortage of HOBC. Even at that time I was fully convinced that refineries were operating below optimum capacity utilization and country’s dependence on imported white oil products were on the rise.

This reminds me that at one stage three new refineries were on cards but even PARCO deferred it Khalifa point refinery. This clearly showed ‘confidence deficit’ and I could not resist from saying that if local investors are shy the country should not expect foreign investment.

Please allow me to say that the worst hindrance in establishing of energy and power generation companies in Pakistan is ‘circular debt’. Following policies of international donors blindly has put the cart before the horse. Added to this is failure of the government to contain blatant pilferage of electrify and gas. The menace prevails due to the absence of political will and inefficient regulatory and legal framework.

The incumbent government, since coming into power has been issuing new/revised deadlines for getting rid of load shedding, I often fear that it is hoping against the hopes. The reason is simple, unless the government makes required structural changes, stopping pilferage is almost impossible. Besides this, the government has to prove by act that is serious in overcoming pilferage and recovery of outstanding dues. Else be ready to face even the worst conditions.

State of Pakistan Economy

Pakistan’s central bank, State Bank of Pakistan (SBP) has recently released its Annual Report for the financial year ended 30th June 2016. The Report is full of praises of the economic managers for achieving targets under prevailing difficult circumstances. However, it also highlights the serious problems facing the country. The bottom line is that unless right structural reforms are undertaken the country may once again plunge deeper in serious crises, worst being balance of payment crisis. I would talk about praises later as I consider it my ardent duty to first highlight the problems facing the country.

Notwithstanding these positive macroeconomic stability gains, the Report highlights some challenges as well. Firstly, the current level of private investments and savings in the country needs acceleration to keep pace with required investible resources. Secondly, structural issues in the export industry need to be resolved. Thirdly, the reliance of the tax system on stop-gap measures is creating distortions in the economy. Finally, the country needs to spend more on social sector development to address social issues.

The Report, considers Pakistan to be well positioned to address these challenges. It anticipates all-important support coming from a stable macroeconomic environment and growing investments in CPEC-related projects. These would help improve the existing infrastructure and power supplies to businesses. Some analysts don’t agree with this rationalization.

The Report recognizes the positive impact of improved macroeconomic environment, better energy supplies, and subsiding security concerns. The central bank believes that in addition to CPEC, economic activity would benefit from pro-growth policies. It specifically says that the current policy rate, at a historic low of 5.75 percent has made funding easier for businesses and consumers. Similarly, growing development spending, despite a planned reduction in budget deficit, would continue to support infrastructure-related industries. One also tends to disagree with this because bulk of the deposits are being invested by commercial banks in government securities rather than extended to private sector.

The Report further explains that though some macroeconomic indicators were short of targets, they still posted better performance over the last year. For instance, real GDP growth of 4.7 percent during FY16 was below its target, but nevertheless higher than the growth achieved a year earlier. Meanwhile, the accumulation of the country’s foreign exchange reserves reached an all-time high level at end FY16; the exchange rate remained stable; and CPI inflation fell to only 2.9 percent during the year. Similarly, fiscal consolidation remained on track, and the budget deficit was reduced to 4.6 percent of GDP – the lowest since FY07. All this is not due to any good policies adopted by the government but lower international prices of crude oil.

The government envisages a GDP growth of 5.7 percent for FY17. The current account deficit is likely to stay in the range of 0.5 – 1.5 percent of GDP during the current financial year. The Report draws attention to the IMF program’s contribution in restoring macroeconomic stability and confidence of international creditors. Crucially, it maintains that the reform process – related to energy-sector, loss-making PSEs (like PSM, PIA), and business-friendly regulations – must continue after the IMF program’s completion.

Finally, the Report reiterates that without private sector participation, it will be hard to achieve a higher and sustainable growth that is built on the pillars of entrepreneurship, innovation and competitiveness.

The detailed Report is available at SBP website www.sbp.org.pk

Pakistan Stock Exchange witnesses 7 percent decline in average daily trading volume

During the week ended 18^th October, Pakistan Stock Exchange remained under pressure due to external and internal pressures. While India continued medium and heavy artillery shelling across the line of control (LoC), Panama case hearing added more confusion rather than providing clarity. As a result the benchmark Index closed 1.2%WoW lower at 42,325 points. Daily average trading volumes also declined 7.1%WoW to 458.6 million shares. Top gainers for the week included: HASCOL, EPCL, PIOC, CHCC and NCL; while losers were: INDU, ICI, ASTL, SSGC and DAWH.

Major news flow for the week included: 1) GoP rejected bids worth Rs113 billion (against a target of Rs50 billion) for this month’s auction of Pakistan Investment Bonds (PIB) as banks sought higher interest rates, 2) SBP reduced SLR for Islamic banks and banking branches by to 14% to induce liquidity near Rs225 billion Bai‐Muajjal maturity, 3) Vitol announced plans to acquire another 10% stake in HASCOL exercising its call option that would take cumulative holding to 25 percent, 4) Oman Telecommunications’ Chief reiterated plans to sell the company’s controlling stake in WorldCall Telecom, 5) Lucky Electric Power Company revised proposal for its planned 660MW power plant following a shift in fuel source to local coal with the EPC arrangement expected to be finalized by before 2016 and 6) SECMC expects to begin commercial operations for its 660MW Thar coal‐fired power project by June’19.

With room for escalation in political tensions on developments on Panama case, delayed till 29^th November, market is likely to remain lackluster. Moreover, futures rollover next week along with possible continuation of foreign outflows is likely to keep market under pressure. Anticipations regarding this month’s monetary policy statement are expected to remain in favor of a status quo, giving support to banking scrips. Continued weakness in coal prices (a decline by almost 18%WoW) can propel price performance in the cement sector while volatility in crude prices ahead of OPEC meeting scheduled on 30^th November may prompt higher activity in energy stocks.

According to AKD Securities, 9MCY16 earnings performance of Bank Alfalah (BAFL) was laudable on a number of counts, especially in terms of improvement in asset quality and effective Current Account mobilization. Flagging NPL ratio of 5.4% ‐ the lowest among ‘Big-Six), the bank's provisioning charges have come down by a sizable 79%YoY to Rs267 million, while coverage has increased to 83.1% in 9MCY16. Gaining confidence from the same, the brokerage house is now more comfortable on the bank's asset quality metrics and has lowered its provision charges. In turn, the bank's CASA hiked to 79% as compared the same period last year, lowering cost of funds. The brokerage house believes there are chances for further trimming, where apart from the aforementioned factors, CAR enhancement to 14.1% and ADR in excess of 50% depicting bank's push for loan growth are additional positives.

Lack of encouraging news flows, following a shift in policy for coal fired power plant (refusal to allow imported coal projects), lack of headway on circular debt clearance and privatizations have weighted on the energy sector companies, with HUBC and KAPCO posting a decline of about 12 and 13 percent FYTD. The impact on future growth projects (limiting of size and scale of planned expansions) from an adverse policy environment may be sizeable, holding down valuations and profitability in the long run.

According to the monthly automobile sales and production data, total vehicles sold reached 16,330 units (down 1.5%MoM and 17.2%YoY) during October this year. The sale comprised of 14,796 passenger cars (increasing 1.2%MoM but down 5.8%YoY) and 1,534 LCVs (falling 22.2%MoM and 61.8%YoY). The halving of GST on tractors allowed sales to climb by 46.3%MoM/93.2%YoY to 4,642 units. Monthly numbers point to a systemic consolidation in unit sales as consumers adjust buying behavior to accommodate for new models, while OEMs phase out models (Hilux by INDU and possibly Cultus by PSMC). Buying behavior is expected to ramp‐up in the beginning of CY17 with newly registered automobiles experiencing an increase in demand, additionally, auto sales growth is expected to normalize in 2QFY17, where the high base of the Rozgar scheme sales normalizes.

Pakistan inching towards balance of payment crisis

Remittances to Pakistan have been on a decline (down 3.8%YoY in 4MFY17), where recovery following the sharp dip in July16 (-20%YoY) has been slow to materialize.

 Driven by weak global macro dynamics and depressed crude oil prices the trend remains similar to other regional countries (Bangladesh/India down 9%/14%YoY in CY16TD) which are also considerably reliant on remittance flows.

 Going forward, we expect seasonal recovery to keep remittances marginally higher in FY17. With effects from current trends lingering we project remittance growth to remain in low single digits over the medium term.

 In this context, we highlight room for greater BoP volatility on weaker trade dynamics. Nonetheless, support to external account is expected to come in the form of higher foreign debt inflows (multilateral and bond issuances) driving exchange rate stability and consequently keeping depreciation pressures on the Pak Rupee limited.

 Pakistan emerged more vulnerable in the region due to a weak global macro outlook impacting remittance flow adversely, with major impact on South Asian countries that share reliance on remittances (avg. Remittance/GDP ratio: ~10%) for foreign inflows.

 Depressed crude prices affecting labor dynamics in GCC region has been a key driver in this regard where the region receives ~63% (2015 est.) of all GCC-sourced remittance. Consequently, Bangladesh and India have seen sharp decline in remittances with flows contracting 9%YoY and 14%YoY in CY16 so far respectively.

 Though initially sturdy, Pakistan is also witnessing a slowdown in remittances with 4MFY17 inflows declining by 3.8%YoY, where inflows from the GCC region declined 4.6%YoY in the same period.

 However, analysts take it as a bigger concern for Pakistan compared to regional peers in the backdrop of worsening trade dynamics (trade deficit up 11%YoY in FY16) compared to Bangladesh/India that contracted trade deficits by 9%YoY/10%YoY in FY16. With oil prices unlikely to mark a sharp recovery in the near-term and slow global demand recovery (UK/European economies), outlook for remittances remains tepid, where the WB has projected a dip of 2.3% in 2016, followed by moderate recovery in 2017/18 (2.2%/2.3% growth).

 Similar to the region, outlook for remittance to Pakistan remains subdued where analysts expect flows to stagnate around US$20 billion. Though currently on a decline, they see room for seasonal recovery near the end of FY17 - with flows increasing marginally for the year.

 Going forward, effects of low oil prices are likely to linger over the medium term, strong correlation of GCC remittance and oil price decline. On the other hand, recent dip inflows from US on account of higher transfer costs is expected to normalize.

 In aggregate, remittance growth is projected to remain in single digits over the medium term. However, key risks remain in the form of further slowdown from UK/EU region on account of Brexit and concerns emanating from recent US elections.

 Going forward, expanding trade deficit (FY17F: 14%YoY) amid weak remittance outlook remains a major risk to BoP stability, where analysts see current account deficit rising to 1.7% of GDP as against 1.2% for FY16).

 That said, concerns on exchange rate stability remain limited, where analysts derive comfort from expected foreign debt inflows (multilateral commitments and another bond issue planned) keeping foreign exchange reserves position stable.

This remains a key positive for exchange rate strength, where stronger foreign exchange reserves position will provide room to counter current account weakness.