State Bank of Pakistan could not gather courage to cut policy rate

On Saturday, 30th January 2016 the newly constituted Monetary Poly Committee (MPC) of State Bank of Pakistan (SBP) decided to keep the Policy Rate unchanged at 6.0 percent. This was a little disappointing for those, hoping against the hope. The general perception was that the MPC will find reasons for not announcing the cut, and this happened. Interesting is the review of the economy but disappointing is the decision as it shows inability of the policy makers to take an appropriate decision.

The good points of the review of economy by the SBP are as follows:

The major macroeconomic indicators continued to exhibit improvements in the first half of the current fiscal year. The inflationary environment stayed benign, LSM gained traction, and fiscal consolidation remained on track. In addition, successful completion of ninth review under IMF’s EFF and disbursements from multilateral and bilateral sources added on to country’s external buffers. With the pickup in private sector credit, for fixed investment in particular, along with improving security situation reflects strengthening of investor and consumer confidence.

Average CPI inflation declined to 2.1 percent during July-December 2015, with perishable food items and motor fuel leading the way. Meanwhile trend in YoY CPI inflation has reversed; it rose for third consecutive month to 3.2 percent in December 2015. Keeping in view the benign outlook of global commodity prices, expectation of a moderate pickup in domestic demand and further ease in supply side constraints, SBP expects the average inflation in FY16 to remain in the range of 3 to 4 percent. However, global oil price trends and excess domestic food stocks (wheat, rice, and sugar) may exert downward pressures on inflation.

Large-scale manufacturing (LSM) grew by 4.4 percent during Jul-Nov FY16 as compared to 3.1 percent in the same period last year. LSM mainly benefitted from monetary easing, falling international prices of key inputs, better energy situation, increased domestic demand for consumer durables, and expansion of construction activities. There are challenges to overall economic performance from the declines in the production of cotton and rice. However, a part of these losses could be offset by better performance of other crops, especially from the upcoming wheat crop. In view of these developments, real GDP is set to maintain the previous year’s growth momentum. The uptick in economic activity appears to continue beyond FY16 on the back of energy and infrastructure projects under CPEC.

Pakistan’s overall balance of payment position continued to strengthen during H1-FY16. The external current account deficit narrowed down to almost half of the last year’s level on account of persistent decline in international oil price and steady growth in workers’ remittances. In the capital and financial accounts, besides strong official inflows, there is some improvement in foreign direct investment.

Given depressed outlook of international commodity prices, the external current account deficit is expected to remain lower than last year. With continuation of the IMF EFF and expected disbursements from other official sources, the surplus in capital and financial accounts may increase in the second half of FY16. These are expected to have favorable impact on foreign exchange reserves. Furthermore, expected increase in FDI from China may help maintain an upward trajectory in foreign exchange reserves. Reversing of trends in exports, however, is dependent on external demand and cotton prices in international market. In addition, easing of domestic constraints with the completion of ongoing energy projects could help in improving export competitiveness.

Fiscal deficit was contained to 1.1 percent of GDP during Q1-FY16, compared to 1.2 percent in the same period last year. This reduction, despite substantial increase in development expenditures during Q1FY16, was due to improvement in tax revenues and containment of current expenditures. The improvement in fiscal accounts may continue in the remaining months of FY16. While additional tax measures announced in October 2015 are expected to contribute to growth in FBR revenues, current spending is likely to remain within target.

The year-on-year growth in broad money (M2) accelerated largely due to substantial increase in Net Foreign Assets (NFA) of the banking system. The growth in Net Domestic Assets (NDA) of the banking system decelerated despite a pickup in private sector credit. On the liability side, deceleration in growth of deposits and acceleration in currency in circulation are source of concern.

The credit to private sector increased by Rs339.8 billion during H1-FY16 as compared to the Rs224.5 billion in same period last year. The impact of monetary easing, improved financial conditions of the major corporate sector and better business environment encouraged firms to avail credit not only for working capital requirements but also for fixed investments. Going forward, the improvements in LSM, expansion plans announced by major industries and favorable monetary conditions are expected to provide continued momentum in the demand for credit.

Some stress in liquidity noticed in Q1-FY16 due to increased government borrowing from the scheduled banks steadily eased in Q2-FY16 owing to improved revenue collection and timely receipt of foreign flows. Besides this, pressures in foreign exchange market also induced volatility in interbank liquidity requirements. This is also evident from movements in overnight repo rate which mostly remained slightly above the SBP target rate.

Will State Bank of Pakistan cut the discount rate?

Governor State Bank of Pakistan (SBP), Ashraf Mahmood Wathra is scheduled to unveil Monetary Policy Decision at a press conference on Saturday. There are mixed opinion of groups due to each having its own vested interest. The commonsense is not likely to prevail as those responsible for making decision are likely to take refuge behind external and internal dictate.

Based the economic indicators the SBP should announce reduction in discount rate to: 1) facilitate private sector borrowing, a must for accelerating GDP growth rate, 2) emulate the develop countries adamant at easing monetary policy for combating prevailing global economic slowdown and 3) reduce cost of borrowing, as the Government of Pakistan (GoP) remains the biggest borrower.

Many economic analysts say that the rule of thumb that higher rate of interest fuels inflation is hardly applicable on Pakistan. The country suffers from cost pushed inflation. The factors like global prices of food and energy products, cost of doing business, electrify and gas outages and above all precarious law and order situation erodes competitiveness of local manufacturers and exporters.

While there are expectations that the SBP will cut the discount rate by 50 basis points, few cynics still believe that the central bank is likely to opt for maintaining status quo. This perception is based on the mantra that spreads of commercial banks are shrinking.

Since commercial banks are the biggest investors of Treasury Bills, Pakistan Invest Bonds and Government of Pakistan Ijara Sukuk there is pressure on the central bank not to cut the discount rate.

As against this sponsors of highly leveraged companies like sugar, textile and cement (also enjoying access to power corridors) are putting pressure on the government to reduce the discount rate. Business of the companies belonging to the above stated sectors has thrived only because of the crutches of the government support.

One may recall that the Government recently approved payment of Rs13/kg subsidy, amounting to Rs6.5 billion on sugar export to facilitate mills owned by the politicians (treasury as well as opposition members).

The retired persons and widows also wish that the central bank should not cut the discount rate further as the return being paid to them by the banks as well as on national savings schemes at present is negative keeping in view the rate of inflation in the country.

Commencing work on Iran-Pakistan gas pipeline

After the withdrawal of sanctions imposed on Iran the way has been cleared for the commencement of construction of Iran-Pakistan gas pipeline (IP). While Iran has already completed its part of the pipeline, Pakistan has yet to begin the work. The pipeline originally included India, which later on backed out due to the US pressure and Pakistan also didn’t go ahead, fearing it may also face economic sanctions.

Three key issues were raised regarding IP: 1) probability of imposition of sanctions, 2) security of pipeline and 3) mobilizing funds for the construction of pipeline. Initially Iran had offered to provide US$250 million loan to Pakistan but the ruling junta didn’t accept it under the pressure of the US.

With the withdrawal of sanctions there remains no hitch except security of pipeline, particularly the portion passing through Baluchistan. If India-Pakistan relationships improve and India also agrees to join the project the threats to pipeline will be minimized. It was often alleged that the militants operating in Baluchistan were supported by anti-Iran and anti-Pakistan elements.

Even since the talk began about import of LNG, I have been the most vocal opponent. This opposition was mainly due to: 1) the pipeline is a symbol of friendship between three countries - Iran, Pakistan, India) enjoy common borders and also have connecting rail and road networks, 2) Pakistan being deprived of huge transit fee, 3) mobilizing capital and 4) delicacies of the technology.

As the entire scenario has changed the outlook and working parameters have also changed. Pakistan could now seek funds from China, Russia and multilateral financial institutions for the construction of the part of pipeline passing through the country.

Despite the most fervent opponent of LNG import, I will still not recommend abandoning LNG project and suggest completing the construction of terminal in Karachi on top priority. However, the project should be constructed by the private sector only without any involvement of the government. This option is another option to boost availability of gas in Pakistan to meet future requirements.

The top beneficiaries of enhanced availability of gas should be industrial units (fertilizer plants and textile units) and not the power plants. Burning gas at power plants is complete waste of this precious resource. Pakistan should also expedite work on hydel power plants, which will also enhance water storage capacities in the country.

Circular debt issue of power sector just can’t e resolved by running power plants on gas. It could only be overcome by containing blatant theft of electricity and recovering all each rupee of the outstanding amount running into billions of rupees.

MOL discovers gas in Pakistan

MOL Pakistan announced on Tuesday that it had made a sizeable gas condensate discovery at Mardan Khel-1 exploratory well in district Hangu of Khyber Pakhtunkhwa.

“This will be a major booster to the exploration activities in the country,” the company said.

Mardan Khel-1, the 12th exploratory well in TAL Block, was spudded on Sept 17, 2014, and reached a total depth at 4,912 metres on Feb 17, 2015.

“During the post-acid test, well flowed 3,440 barrel per day (bpd) of condensate, 40.56 million standard cubic feet per day (mmscfd) gas with 5,822 psi pressure at 40/64 inches fix choke,” the company said.

It was the seventh discovery in the Tal block after Manzalai, Makori, Mamikhel, Maramzai, Makori East and Tolanj oil and gas condensate discoveries since 2002.

Pakistan Stock Market Still Attractive

On Saturday, the U.N. nuclear watchdog announced Tehran had met its commitments to curtail its nuclear program and the U.S. was prompt in revoking the sanctions. These moves were not unexpected and the stock investors were mentally ready for such news.
In Pakistan PSX-100 took a nose dive and lost more than 1,000 point soon after opening of the market. It was much anticipated that with enhanced export of crude oil, its price will erode. Selling in E&P companies was anticipated but the phenomenon was not unique to Pakistan.
In Pakistan the general perception is that foreign fund managers are on selling spree. Prices of scrips in which foreign funds have huge investment (OGDC, PPL and POL) are down but the volume in their shares is still not very high. Bulk of the volume is still being contributed by second and third tier companies.
At the time I am posting this update the market has already recovered nearly half of the lost points. I am of the view that as the day proceeds those feeling jittery will gather the courage. Historically, at such junctures institutional investors step in and buy at bargain price.Therefore, my suggestion to the investors is ‘not to panic’, keep a close watch and enter the market at appropriate time.

Pakistan discovers a tiny gas field

Oil and Gas Development Company (OGDC) has made another gas discovery with initial production of 23.50mmcfd from its exploratory well in Sukkur in Sindh province of Pakistan.

According to the information provided to Pakistan Stock Exchange (PSX) by OGDC the Thal East well #01 was drilled down to the depth of 4,468 meters whereby reserves of hydrocarbon have been found in Basal Sand of Lower Goru Formation.

The details further says one more zone in Lower Goru Formation Sand is available which is yet to be tested and hopefully will add more reserves.

Hi-Tech shares to be offered at Rs62.50 to general public

The book building process of Hi-Tech Lubricants Limited has attracted enormous response and it has been over-subscribed by 2.24 times in the first stage of Initial Public Offering (IPO) of the company, which closed on Friday.
According to the details shares of the company were offered at a base price of Rs37 per share, but due to high demand during the two-day book-building process, the closing strike price touched Rs62.50 per share.
In book building process, only corporate entities and high-net worth individuals can bid for shares. The company was able to raise Rs1.35 billion from the offer, which made available 75% or 21.75 million shares out of the IPO for 29 million shares. Investors had offered bids for 48.674 million shares of the company.
In the next stage of the IPO, the remaining 25% or 7.25 million shares will be offered to general public at the strike price of Rs62.50.
Arif Habib Limited is the lead manager, arranger and book runner for both the IPO segments.
Commenting on the investor response to the book building, Hi-Tech Lubricants Director Shaukat Hassan said, “We are also extremely happy to become the first-ever listed company after the formation of Pakistan Stock Exchange (PSX).”

Saudi-Iranian Standoff a threat to global peace

The recent standoff between Saudi Arabia and Iran is not something new but has deep roots spread over centuries and goes beyond dawn of Islam. In the recent past some of the quarters in the Kingdom have been saying, Iran is an enemy worse than Israel”.

Nathalie Goulet, Deputy Chairman of the Commission of Foreign Affairs and Defense Forces at the French Senate, recently said Saudi Arabia cannot bear Iran returning to international arena and it has planned the recent dispute as a scheme to hamper Iran’s growing international relations.

He says it is a war of economy and seeking the upper hand behind a mask of religion. Behind the religious differences and generations-old grudges that Saudi Arabia and Iran hold against each other, there lies a sense of arrogant rivalry and an economic war as well.

He is of the view that Persian Gulf littoral countries, not least of all Saudi Arabia, never accepted the Iran nuclear deal, regarding which they still preserve their rage against the United States. He is of the view that the Wahhabi king has not only to fight the Islamic, but to prove that fighting the group is a real objective with Riyadh as well, even though the monarch has been accused of funding ISIS.

Therefore, besides several beheading punishments on the onset of the current Christian year, Saudi Arabia needed to make a coalition more powerful than 34 countries.

In this complex region nothings comes as coincidence. Saudi Arabia knew well that by executing a dissident Shiite sheikh, it would not only trigger anger and demonstrations on the streets of Tehran, but enrage regional Shiite minorities in Bahrain, Yemen and Lebanon as well.

This was a well-calculated move from Saudi Arabia to stimulate rival Iran. This comes amid Iran’s attempts to return to the scene of world politics as Tehran has turned into the unavoidable venue for politicians, tourists, and businessmen.

The revival and return of Iran to the international arena is unbearable for Saudi Arabia. Since Saudi Arabia is facing a historical budget deficit of US$87 billion, equal to 20 percent of its GDP, Iran in the near future will gain access to over $100 billion of its assets blocked around the world.

Saudi Arabia does with a very convoluted governmental system. Feeling secluded and abandoned by the US, Saudi Arabia feels downgraded by turning into the States’ second ally.

Therefore, Saudi Arabia is forced to prove that it really wants to fight terrorism. By executing a Shiite leader and enraging all Shiites, it showed it wants control over the Gulf, one that in the eye of Saudi Arabia cannot be a Persian gulf.

Although the US has also tried to give an impression that it disapproves action of the Saudi government, the strategies of Saudis are clear: to hamper the process of Iran’s return to the international arena step by step.

To achieve its ultimate objective Saudi Arabia intends not only to team up with Persian Gulf kingdoms, but is eyeing relations with Turkey and, in particular, Israel. As it goes, the enemy of enemy is a friend, seems to be true about governments as well.

A meager spark is needed for a highly militarized region to turn into a blazing furnace, either directly or via in-between agents which Iran cannot control.

It is feared that, like the days of the Iran-Iraq war, the West would support Iran’s rivals, at the top of which stands Israel. It seems that the worrying silence of ambassadors supports that view.

However, no one should forget that the world needs unity to fight the ISIS but one witnesses a pointless diplomatic pressure rising in Iran and Saudi Arabia. The entire balance and stability of this strategic region is at stake. It seems arms dealers are going to have bright days ahead.

All the nations have to curb the factors that can aggravate sectarian conflicts between the Shiite and Sunni. It is the harsh reality emerging right before all of us certainly to turn against us, with flares going beyond the current boundaries.

Public offering by Hi-Tech Lubricants

Hi-Tech Lubricants Limited (HTLL) will become the first lubricant company to go public, by issuing 29 million shares at a floor price of PkR37/share through book building of 75% of the total issue size (6th and 7th January) and remaining 25% to offloaded through general public subscription (25-27 January 2016).
HTLL is expects to raise at least PkR1.07 billion from the listing which will be utilized in expanding its footprint in the lubricants market through forward (establishing retail network) and backward integration (construction of an additional filling line).
HTLL has an established presence in the automotive sector through its “ZIC” brand (14% market share in the passenger car sub-segment) contributing 56% to overall revenues becoming a key growth driver for the company.
Post IPO, the company plans to focus on diesel and motorcycle sub-segments of the automotive market (contributing 31% and 9% to revenues) through competitive pricing and cost efficiencies of bulk imports (utilizing the blending plant).
With an aggregate market share of 6% in lubricants, robust 5-year revenue CAGR of 20%, Gross Margin averaging 24% and Net Margin of 6%, HTLL’s fundamental outlook remains promising.
HTLL) is engaged in the import and distribution of petroleum products/lubricants under the brand name of “ZIC” in Pakistan. It imports lubricants from South Korea, which has the single largest Petrochemical Chemical Complex in the world.
HTLL has a network of more than 150 distribution channels across all major cities of Pakistan. The Company diversified from trading to manufacturing and established a state of the art blending plant at Lahore that became operational in 1QFY16.
HTLL plans to utilize IPO proceeds for funding its investment plan of PkR1.25 billion which envisages the development of a service delivery channels with 37 retail service outlets (9 owned and 29 rentals) and additional filling lines (expected to be streamed online by August this year at its Blending Plant (recently set up with a total investment of PkR776 million).
Analysts believe healthy demand exists for its products. However the company has been facing hurdles in meeting this demand due to shortage of product supply on account of 1) time lag in imports and 2) foreign market specified product sizes of finished products, rendering them ineffective for local market, especially for motorbike segment.
Additionally, HTLL’s newly setup Blending Facility is expected to provide rationalized cost benefits to the company as it is likely to now import in bulk as compared to sealed cartons. The new plant will also produce its own High Density Poly Ethylene bottle/Cap and filling lines for imported lubricants, further extending its cost-saving benefits.
The company has been able to keep costs of goods sold (COGS) at a steady 76% of total revenues, indicating preferred pricing from the supplier and ability to pass on the impact of changes in the PkR/US$ parity. As a result, gross margins have been maintained at a stable 25% during the last five years.
That said, administrative and distribution costs have increase by a 5-year CAGR of 26% as the company increased its footprint in the sector. As a result, bottom-line of the company has recorded a 5-year CAGR of 6.2% during FY10-FY15.