Pakistan: IMF assistance too near yet too far

There are no known reasons about what is causing delay in IMF Staff Level Agreement. According to media reports the Fund seeks assurances from the friendly countries for funding gap. It seems the program is near from the Government side but still too far from the IMF side.

In a week mired with political uncertainty, the movement at Pakistan Stock Exchange remained jittery. Furthermore, the IMF has set forth another condition regarding written assurances from friendly countries to fund balance of payment gap before the Staff Level Agreement (SLA). The ICBC has given assurance that it will provide another refinanced US$500 million loan in few days bringing total commercial loans refinanced up to US$1.7 billion.

Pakistan’s foreign exchange reserves inched by US$18 million to US$4.3 billion as on March 10, 2023, culminating to an import cover of less than a month.

The benchmark index closed the week at 41,330 points, down 1.11%WoW. Participation in the market increased, with daily volumes averaging 223.02 million shares during the week, from 209.24 million shares in the prior week depicting a gain of 6.6%WoW.

Other major news flows during the week included: 1) Saudi Arabia extended US$1.2 billion deferred oil payment facility till February next year, 2) GoP raised PKR26 billion through PIBs auction, 3) July-January LSM output declined 4.40%YoY, 4) Bank deposits were up 15%YoY to Rs22.9 trillion in February, 5) workers’ remittances for February post 5%MoM growth and 6) GoP announced plan to borrow PKR7 trillion from banks in three months.

Top performing sectors were: Woolen, Glass and Ceramics, and Sugar & Allied industries, while the least favorite sectors included: Miscellaneous, Close- End Mutual Fund, and Synthetic and Rayon.

Stock-wise, top performers were: YOUW, TGL, CEPB, DGKC, and BNWM, while laggards included: PSEL, NESTLE, FHAM, BAHL, and RMPL.

Flow wise, individuals were the major buyers with net buy of US$4.23 million, followed by Banks/DFI with net buy of US$1.06 million), while Insurance companies were major sellers during the week, with a net sell of US$2.08 million.

Any further development on the IMF front is likely to set the direction of the market. The recorded high inflation of 31.5%YoY in February 2023 is expected to remain a thorn in the country’s side, driven by hikes in tariffs along with Rupee devaluation. This may lead the market to another hike in upcoming Monetary Policy accouchement scheduled for April 04, 2023.

Moreover, the local currency has continued to slide against the US dollar with no certainty regarding its limit. With this backdrop, analysts continue to advocate scrips that have dollar-denominated revenue streams to hedge against the currency risk, which include the Technology and E&P sectors.

 

 

 

Reinvigorating capital market of Pakistan

The newly installed government in Pakistan faces a mammoth task of reinvigorating capital market of the country. This should be among the top five most important items of the economic agenda. The fiscal consolidation requires some other unpopular measures that include: 1) improving tax collection to bridge budget deficit, 2) containing extravaganzas for spending more on development, 3) boosting exports by making Pakistani manufacturers/exporters competitive in the global markets and 4) privatizing state own enterprises to save one trillion rupees which these units swallow annually. Since the role of the government is to facilitate the business community in making fresh investment for the creation of new job, stock exchange is one of the most important institutions that play a key role in the mobilization of capita. An effort has been made to review the factors affecting the performance of Pakistan Stock Exchange (PSX) and suggest the impetus to make it more vibrant. To read details please click http://www.pakistaneconomist.com/2018/09/03/reinvigorating-capital-market-of-pakistan/

Pakistan Stock Market Takes a Dip of Nearly 8 Percent

With announcement of FY18 Deferal Budget and Pakistan’s formal inclusion in the MSCI EM Index, the week ended 2nd June 2017 remained eventful. Contrary to the expectations, fiscal prudence superseded election year populist measures in the Budget, while unexpected tax restructuring for the stock market induced further volatility (15% CGT regardless of the holding period, enhancement of tax on dividend to 15%). On the other hand, the transition to MSCI EM Index triggered a sell‐off on the likely rebalancing of the portfolios. The benchmark of Pakistan Stock Exchange index lost 4082 points or 7.75%WoW to close the week at 48,555. The average daily volumes declined to around 295 million shares, but the average traded value soared to its decade high of over US$240 million. Other key news flows during the week included: 1) Hussain Nawaz appearing before the JIT, 2) CPI based inflation in May’17 rising to over 5%, at 30‐month high, 3) GoP reducing the MOGAS/HSD prices, 4) LHC dismissed petitions filed by commercial importers against the anti‐dumping duty on flat steel products, 5) MoF reportedly agreed to provide Rs45 billion to IPPs and OMCs in lieu of circular debt. MSCI Pakistan EM index large and mid‐cap constituents were major losers during the week, where: HBL, LUCK, UBL, MCB and OGDC.With Pakistan formally part of MSCI EM Index, analysts expect short‐term volatility to continue where the market is likely to take guidance from foreign activity. That said, any development with regards to the revised margin financing product along with Panama‐gate’s JIT proceedings are likely to drive sentiments accordingly.

As eventful as it was, the market gained 2.6%MoM during May'17 in anticipation of a populist budget while gearing up for Pakistan's formal inclusion in the MSCI EM index. However, gains remained limited (the market lost 4% since the presentation of Budget FY18) where, contrary to expectations, fiscal prudence superseded election year populist measures in

Budget FY18. Also, an unexpected tax restructuring for the stock market induced further volatility. On the other hand, the transition to MSCI EM Index triggered a sell‐off with the benchmark index losing 1.7%, just a day before formal inclusion of Pakistan in MSCI EM. In this regard, profit taking was evident in MSCI EM stocks with traded value recorded at US$508.7 million, touching its decade high. Going forward, foreign activity is likely to guide the market sentiments in the short term with the market seeing increased volatility until complete re‐balancing of portfolios. However, analysts expect key themes like: 1) materialization of CPEC projects, 2) healthy corporate earnings growth, 3) interest rate reversal and 4) the pressures on the PkR to take center stage until general elections next year.

Despite widening trade deficit, rising by nearly 37% in 10MFY, focus on export‐oriented sectors remained missing in the recently announced FY18 budget. While relief measures under the export package (zero‐rating regime, discounted EFF & LTTF and duty‐free machinery import) were extended and new protectionist measures introduced (GST @10% on import of fabric and 5% RD on import of filament yarn), no solid initiatives were undertaken with regards to energy subsidy (to reduce power cost) and refund claims except allowing of payment of refunds. Moreover, the 1% increase in GST on retail sales to 6% further add to the woes of industry players having a  higher proportion in the local sales mix should they choose not to pass on the cost increment to consumers.

Pakistan Stock Market Remains Lackluster

Trading at Pakistan Stock Exchange remained lackluster evident from benchmark index sliding by 1.7%WoW and closing the week at 48,156 points. The average daily trading volume also declined by 3.5%WoW to 248.7 million shares.The lack of investors’ interest can be attributed to political volatility and absence of market triggers. News flows for the week included: 1) SECP in its press release dated 29th March apprised that its constituted committee (for reviewing in‐house financing) had submitted a report which focused on introducing reforms in Margin Financing (MFS) to improve banks' funding to investors through brokers, 2) GoP released total Rs505 billion (63% of total Rs800 billion allocated) inclusive of Rs122 billion from foreign aid, 3) GoP allowed PTA to auction a next generation mobile services (NGMS) license with a base price of US$295 million from the frequency spectrums left unsold in the previous two auctions, 4) NML announced selling of 40% stake of its auto assembling business to the Japanese giant Sojitz Corporation and 5) OGRA proposed an increase of POL products for April. Stocks leading the bourse include: SHEL, MTL, ASTL and MEBL, whereas laggards were: HASCOL, AKBL, KEL, NML. Volume leaders were: BOP, ANL, KEL and ASL. Headline inflation is expected to guide expectations for monetary policy and may trigger a rally in banks. Additionally, the much awaited outcome of Panama case hearings could alleviate political pressures.

Circular debt and overdue receivables remain a usual element in cash strapped liquidity dynamics for the power sector. Taking a comprehensive approach, AKD Securities map the timeline of developments and quantum of circular debt build up since the one‐time clearance of Rs480 billion in June 2013. Its analysis show that in a large number of cases the GoP has been asked by independent arbitrators (foreign and domestic) and high courts to clear the pile‐up. This perception gains further strength based on increasing reliance on IPPs in power generation mix particularly in the backdrop of 10,663MW of gross capacity additions coming online by CY20. Also, with its political agenda hinging on resolving the prevailing power deficit of over 5,000MW, it is believed that a limited clearance of overdue payables to them is more likely. The Rs48 billion being claimed by 13 IPPs currently is a minor hiccup whereas IPPs with planned CAPEX outlays have increased pressure to free up liquidity tied in GoP receivables (case in point being HUBC where the room for leverage falls from Rs71.7 billion in FY16 to Rs27.8 billion in 1QFY17 and Rs1.8bn in 2QFY17).

Inconsistent with previous month's improved performance, Pakistan’s exports remained lackluster in February 2017, declining by 8.0%MoM/8.6%YoY to US$1.64 billion. Total exports registered a decline across all segments, with highest impact coming from the heavyweight Food and Textile sectors amounting to US$318.9 million and US$995.3 million, sliding 12.7% MoM/24.6%YoY and 6.5%MoM/2.7%YoY respectively. On a cumulative basis, 8MFY17 textile exports were 1.6%YoY lower at US$8.23 billion, largely contributed by 9.2%YoY decline in the low value segment diluting the impact of 1.6%YoY growth in the value added segment. Contrary to expectations, inclusion in zero rated regime and recently announced export incentive package worth Rs180 billion (textile sector's share estimated at close to 90%) has so far failed in generating positive momentum in export trend, giving way to fresh concerns regarding the export‐oriented industry's competitiveness over regional players. Going forward, analysts expect textile exports to remain under pressure due to: 1) weak Chinese demand outlook and concerns of economic slowdown in the European Union following Brexit and 2) lack of currency competitiveness. Moreover, continuous rise in international and local cotton prices has also aggravated concerns about textile industry.

ASTL has recently raised its re‐bars prices per ton by Rs2,000 (up 2.5%) to Rs79,000 likely due to: 1) increase in scrap steel prices and 2) rise in Chinese re‐bar prices due to higher domestic demand as a result of improvement in Chinese property sector and continuous decline in steel production. The recent price increase is likely to improve the bottom line. That said, current re‐bar prices still remain below FY16 average of Rs83,000/ton resulting in reduced gross margin/earnings for FY17F. While the upcoming expansion is to aid earnings growth, analysts believe the current price level is already reflects that.

Pakistan stock market remains under pressure

The benchmark index of Pakistan Stock Exchange remained volatile during the week owing to political developments related to Panama case. With changing tone of the Supreme Court bench in favor of Prime Minister, the market reversed its earlier losses and closed at 49,365 levels, up 0.31%WoW. Textiles, Autos and Steels were the major driving sectors owing to announcement of textile package, early models launch/robust sales, and imposition of anti‐dumping duty on CRC imports, respectively. As against this, E&Ps and Banks provided major drag on Index due to foreign selling as Privatization Commission approved divestment of OGDC, and expectations of delay in interest rate liftoff, respectively. Average daily traded volumes fell by 20%WoW to 489 million shares where volume rankings continued to be occupied by second tier scrips such as: TELE, FABL, KEL, SSGC and BOP. Volume leaders during the outgoing week included: MTL, SNGP, HCAR, PSMC and ICI, while laggards included: OGDC, ASTL, HBL, UBL and PSO. Key developments during the week included: Prime Minister restored subsidy on fertilizer which was earlier withdrawn by the Ministry of Food, 2) SECP proposed setting requirement all equity funds and funds of funds would have to maintain at least 5% of net assets in cash and cash equivalents, 3) NTC imposed anti‐dumping duty of 13.17%‐19.04% on imports of cold rolled coils/sheets from China and Ukraine for a period of 5 years, 4) Privatization Commission approved initiation of capital market transaction of OGDC’s with divestment of up to 5% stake, and 5) The cut‐off yield declined slightly at the latest Treasury Bills auction with heavy participation of Rs1.071 trillion, while bids valued Rs538 billion were accepted. The market is expected to remain volatile in near term due to political risk associated with ongoing Panama case hearings. Possible selling spree of mutual funds to meet proposed SECP requirement can create additional pressures. Expectations of delay in interest rate liftoff may continue to keep banking sector under pressure. While analysts expect status quo in upcoming Monetary Policy announcement later this month, it can shed further light on interest rate outlook. However, analysts also believe that Textiles, Autos and Steels to remain in limelight due to aforementioned developments. Telecom/IT sector may also garner investors’ interest as the government plans to announce tax relief package for Telecom/IT sector.

With a sharp rise in December'16 (US$1.08 billion), current account deficit in 1HFY17 has accumulated to US$3.58 billion, higher than the deficit recorded for the last fiscal year. The deterioration in 1HFY17 reflects weak trade dynamics (trade deficit up 15.6%YoY) on declining exports and tepid remittances. Going forward, analysts expect the trend to continue with FY17 current account deficit at 1.85% of GDP on account of anticipated increase in imports as crude oil prices stabilize at higher levels and remittances failing to provide support. Concerns also remain on foreign investments as FDI from China has remained lower this year (down 54%YoY in 1HFY17) with the 10%YoY increase in 1HFY17 reflecting US$462 million flows under EFOODS's acquisition. Within this backdrop, analysts highlight mounting risks on foreign exchange reserve with upcoming external repayments (cumulative US$1.5 billion‐ US$1.75 billion under Eurobond, Paris Club and China SAFE debt retirement) largely funded through debt flows.

Lucky Cement (LUCK) is scheduled to announce its 2QFY17 result on 26^th of this month and expected to post consolidated/unconsolidated earnings of Rs4.27 billion/Rs3.48 billion (EPS: Rs13.21/Rs10.78), up 10%YoY/6%YoY from Rs3.87 billion/Rs3.29 billion (EPS: Rs11.97/Rs10.16) for 2QFY16. The growth in earnings is expected to be led by growth in topline owing to 11.3%YoY growth in dispatches as domestic dispatches are expected to go up 23.3%YoY backed by stronger domestic demand and additional sales of clinker to FCCL. However, increase in average coal price by 68%YoY is expected to shrink gross margin (GM) to 43% limiting gross profit growth to +1%YoY. Inter alia, 17%YoY decline in distribution cost due to fall in export dispatches by 28.5%YoY, and 76%YoY higher other income due to higher cash base is expected to result in further earnings growth. Consolidated earnings are expected to get a further boost from operations of 50MW wind farm and 1.18 million tpa cement plant in Congo.

AKD Securities has revisited its investment case for ASTL owing to recent increase in re‐bar prices by Rs3,000/ton. The increase in re‐bar prices is attributable to the rise in imported scrap prices and Chinese re‐bars prices. In this backdrop, ASTL has rallied 44% during January’16 so far, while further increase in domestic re‐bars prices is anticipated. In this regard, analysts estimate Rs1,000/ton increase in re‐bars prices to potentially raise earnings. However, they highlight that the local re‐bars prices are being raised to pass on cost of scrap where US$10/ton increase in scrap price is expected to dampen earnings by Rs0.88/share while it will require Rs1,300/ton increase in re‐bars price to completely pass on this cost. They also believe that ASTL's price rally has been overdone.

Pakistan Stock Exchange closes at all time high

The benchmark index of Pakistan Stock Exchange (PSX) closed at an all‐time high of 42,849 points for the week ended 11^th November 2016. Average daily traded volumes inched up by 2%WoW to 494 million shares where volume rankings continued to be occupied by second tier scrips such as: BOP, PIAA, TRG, TELE and SSGC. Leaders during the outgoing week included: AGTL, MLCF, SSGC, FCCL and FFBL while laggards included: SHEL, KEL, HUBC, OGDC and NBP.

Key developments during the week included: 1) almost 22%YoY increase in trade deficit to US$9.32 billion during first four months of current financial year, 2) a 3.83%YoY decline in workers' remittances to US$6.26 billion, 3) increase in cutoff yields of Treasury Bills of 3 and 6 months tenors, while all the bids for 12-month papers were rejected, 4) the GoP’s plan to issue international Sukuk Bonds worth US$500 million against Islamabad Lahore Motorway for budgetary financing and 5) nearly 13%YoY growth in total cement dispatches to 3.527 million tons in October 2016 due to a rise in infrastructure development.

Though, political tension eased off with PTI calling off its protest, political risk remains as Panama‐gate’s next hearing is scheduled for 15^th of this month. However, analysts expect market to continue its rally led by heavyweight sectors like cements and banks. The monetary policy to be announced later this month is expected to maintain status quo. Also, OPEC meeting later this month in order to decide production cuts may provide boost to E&Ps.  

Results for the US presidential elections place Donald Trump as the US President Elect. While analysts believe that the US foreign policy under Trump presidency can be volatile in nature, there is also a possibility of an overhaul in US‐Pak relations. The republican's campaign rhetoric compels analysts to believe that micromanagement and unilateral actions along Pakistan's borders may ease out under Trump presidency.

In this backdrop, Pakistan has done well by diversifying its foreign relations towards Russia (joint military exercise recently conducted in Pakistan) and China's ongoing ambitions in investing heavily into Pakistan. In line with global markets, near term volatility at the PSX also cannot be ruled out. However, Pakistan market's correlation with regional markets has decoupled on the former's possible inclusion in the MSCI EM Index and momentum for infrastructure and economic development together driving 21%CYTD returns for the benchmark index which is expected to continue in the medium to long term.

Dull exports in continuation of what has been the unflagging trend now, Pakistan exports remained on the lower side for September 2016 at US$1.52 billion as compared to US$1.72 billion for September 2015, down 11%YoY. Total exports registered a decline across all segments, with the highest impact coming from heavyweights Textiles and Food sectors, which were US$961.0 million / US$238.8 million, sliding by 12.1%YoY / 14.7%YoY. Consequently, 1QFY17 total and textile exports were recorded at US$4.68 billion and US$3.03 billion respectively, marking a decline of 9%YoY and 6%YoY.

Going forward, analysts expect textile exports to continue remain under pressure due to: 1) slowing Chinese demand, 2) lack of currency competitiveness limiting GSP plus benefits, 3) concerns of an economic slowdown in the EU following Brexit, constituting 20%‐25% of textile exports, and 4) shortage of cotton supply after tapering cotton production last year with arrivals down by 34%YoY. However, the soon‐to‐be announced export incentive package worth Rs175 billion by GoP, in a bid to reduce the cost of doing business and enhance competitiveness of export‐oriented industries with regional countries, remains a key near‐term trigger for the sector.

Forecasting steady spell of growth for OEMs in the country, sector experts analyze the current value proposition of the three major assemblers, being Japanese in origin. Highlighting the positioning of each in the prevailing market structure, analysts point to avenues for deepening demand of locally produced offerings. Commenting on the rise of Japanese OEMs in the region, they look at falling demand in traditionally high growth markets (Thailand, Malaysia) as a reason to aggressively introduce new offerings, as CKD units are freed up, and may be diverted to high growth markets. FTA being discussed through bilateral arrangements (Thailand, Turkey and Korea) may further this move, but on the flipside, favor new entrants. The case of low price, eco segment vehicles making up a large portion of first time car purchase, in the region, particularly in Thailand may be implemented at home. Price competitive offerings in the 1000CC and below segment make up to 50% of overall passenger sales, while the small economy segment (below 800cc) dominates the import market (4,417 units imported in 2MFY17 making up 52% of total imports).

Pakistan stock market closes the week almost flat

The benchmark of Pakistan Stock Exchange PSX‐100 Index closed flat for the week ended 27^th May at 36,694. The index returns underperformed the region by 2.40% due to heavy‐weight sector banking’ disappointing run amidst unexpected 25bps cut in policy rate by the State Bank of Pakistan (SBP). This also caused average daily traded volumes to plunge by 23%WoW to 249 million shares as compared to 325 million shares exchanging hands a week ago.

Though, foreign selling continued, it stood at US$3.81 million as compared to US$6.98 million a week ago. Leaders during the outgoing week included: HASCOL, PSMC, DAWH, SNGPL and ENGRO, while laggards included: MCB, MEBL, EPCL, HBL and SSGC.

Key developments during the week included: 1) MCB said to be in preliminary non‐binding discussion with Fullerton Financial Holdings for a possible merger with NIB, 2) GoP decided to increase PSDP outlay by 11% for FY17 to Rs1.675 trillion from current year’s allocation of Rs1.514 trillion, 3) GoP likely to increase the tax on dividend income to 20% for non‐filers while 15% tax on dividend income for return filers and it may also start charging advance tax on the alternate corporate tax, 4) SBP slashed the policy interest rate by 25bps to 5.75% in view of its assessment that inflation would remain below the target set for the FY16 and 5) the current subsidy on DAP to the tune of Rs20 billion (Rs500/bag) shared on a 50‐50 basis by the federal and provincial governments is likely to continue in the next fiscal year with Ministry of Food proposing to remove the GST on DAP and other fertilizers.

Anticipations about next fiscal year’s budget, due to be presented next week, continue to build up and will keep the index range bound. Analysts expect the budget to remain neutral for most sectors, with chances for some negativity in foods and other import‐based sectors, amidst proposals for customs duty hikes. Additionally, increased spending on infrastructure, farmer subsidies (proposal to remove GIDC, continuation of DAP subsidy) and provincial schemes would keep cements, fertilizers and steel sectors in lime light. However, with Ramadan around the corner, the theme of lackluster volumes and listless trading is expected to prevail.

I posted a blog ‘too little too late’ after SBP announced 25 basis points reduction in interest rate. However, Pakistan leading brokerage house AKD Securities has a different stance. In its report it has said that contrary to market's consensus of interest rates having bottomed out, the SBP in its latest announcement cut the policy rate by 25bps to 5.75% (DR: 6.25%). The surprise move came with little justifications where the statement highlighted: 1) higher inflation projections for FY17 on expectations of global commodity price recovery and higher domestic tariff and tax incidence, 2) limited credit uptick (8.4%YoY as of Mar'16) despite prior 400bps rate cut, 3) BoP risks in the form of higher trade deficit, decelerating remittance growth and weak capital inflows ‐ all key macro trends warranting a prudent stance. With tighter fiscal targets, the 25bps reduction is unlikely to serve as a growth catalyst, where analysts view GoP to emerge as the key beneficiary with nearly Rs1.6 trillion PIB maturities due July'16. With macro risks in place, a quick reversal in the monetary policy remains a possibility, though key determining factors from here onwards are likely to SBP's target for real interest rates and PIB roll‐over.

With Budget FY17 less than two weeks away, market expectations regarding are running high. Targeting GDP growth rate of 6.2% (4.71% in FY16), news flow is shaping budget FY17 to be unpopular in nature, where additional taxes will be imposed, to boost up FBR related up revenues, are already under consideration. In this regard, super tax extension, withdrawal of remaining SROs, increase in Withholding tax on banking transactions to 0.6% for non‐filers, are some of the important ones. While continuation of Super Tax undermines profitability growth of the  bluechip companies, positives for Fertilizer is removal of GST/GIDC on urea, subsidy extension on DAP to aid offtake growth) and Autos (lowering of import duties in order to incentivize incumbents) whereas negativity could come in Foods Producers (imposition of 10% sales tax on milk). That said, market level developments (such as increased taxation on dividend income, removal of tax exemption on pension funds) are not very encouraging either. While initial market reaction could depict volatility, investors' sentiment and attention are most likely to soon turn towards the MSCI reclassification (EM status) announcement on 14th June.