Bangladesh: Quest for ensuring energy security

Bangladesh was in the middle of an energy crisis last year, with rampant electricity shortages owing to the protracted Russia-Ukraine conflict which has had implications for the entire South Asia. The latter half of last year saw Bangladesh facing a shortage of 1000-1500 MW electricity on a daily basis, resulting in regular hour-long episodes of load shedding. Yet, it was more than the comfort of its citizens at stake, if the problem of frequent power cuts was not dealt with.

Bangladesh, one of the fastest growing economies in the world is largely dependent on the export of textiles and readymade garments. In fact, Bangladesh is one of the largest garment exporters in the world, making the garment industry its biggest source of foreign exchange. The looming energy crisis was, and if not dealt with properly, will, continue to affect the efficient operation of the Bangladeshi garment industry. The workers in the industry operate within a strict time frame in order to meet their international clients’ deadlines. It is an energy intensive industry and frequent power cuts on a daily basis would result in many industries relying on generators – so that the flow of work is not disrupted- driving the production costs up, ultimately affecting the efficacy of the industry and its desirability for foreign clients and investment.

Energy generation has been a priority for the Awami League government since they took office more than a decade ago and it is clear that Sheikh Hasina understands the importance- now more than ever- of a long-term energy security plan through regional cooperation. For that purpose, Bangladesh has, over the last decade increasingly looked at India for collaboration and support in the energy sector.

The inauguration of the India-Bangladesh Friendship Pipeline (IBFPL) a few days ago is the most recent manifestation of this strategy. The 131.5 km long pipeline connecting Siliguri in West Bengal to Parbatipur in Dinajpur district of Bangladesh will supply one million metric tons per annum of diesel to the seven districts of north Bangladesh. As Bangladesh imports most of the fuel for electricity, the cost reduction aspect of transporting diesel- from each barrel now costing 5 dollars (when earlier it cost 8 dollars per barrel)- is extremely important along with the shortened transportation time.

Furthermore, prioritizing the energy security of the traditionally backward North Bangladesh is in line with Sheikh Hasina’s policy of ensuring equitable distribution of the benefits of development equally across all regions in Bangladesh. The Rangpur and Rajshahi districts of North Bangladesh have also been the focus of other development projects under Sheikh Hasina’s leadership. Traditionally, the western part of the country has been worse affected by poverty than the eastern part. In 2010, a year after Awami League had come into power, Rangpur had a poverty rate of 42.3%. This was the impetus for launching the Northern Bangladesh Integrated Development Project in 2013 that was aimed at infrastructural development and greater availability of and accessibility to public services in order to reduce the regional disparity in economic development.

Apart from this, Sheikh Hasina, having being encouraged by Prime minister Narendra Modi to allow Indian companies entry in the power generation sector of Bangladesh during his Dhaka visit in 2015, had signed US$4.5 billion worth of deals with the Indian government, that would allow private companies as well as companies run by the government of India to sell electricity in Bangladesh.

One of these deals involved the Bangladesh Power Development Board (BPDP) signing a 25-year Power Purchase Agreement (PPA) with Indian billionaire Gautam Adani’s Adani Power (Jharkhand) in 2017. Under this agreement, Adani Power is to build a 1600 MW coal power plant, worth US$1.7 billion in Godda, Jharkhand, to supply power to Bangladesh.

With Bangladesh gaining a strong presence within South Asia as well as outside of it, India has also sought to increase energy cooperation with Bangladesh. This is evident from the Modi-Hasina summit in September of last year and India’s aim to expand cooperation and dialogue amongst the BBIN countries (Bangladesh, Bhutan, India and Nepal).

The Sheikh Hasina government has proved itself adept at balancing great powers while securing investments that best suit their interests. The Russia-Ukraine war has likely expedited Sheikh Hasina’s policy of reaching out to alternate sources of investment for the energy sector, like the oil rich gulf countries for example. She recently spoke at the Doha Investment Summit, calling for the formation of a joint trade and investment committee by both Bangladesh and Qatar governments.

She especially welcomed Qatari investment in the energy sector. Nearer to home, it has steadily strengthened its relationship with its key neighbour, India. Now, the revitalisation of energy trade with India might also lead to energy trade with Nepal and Bhutan, thus opening up hitherto unexplored opportunities for harnessing the hydropower potential of its Himalayan neighbours. This would help Bangladesh access renewable energy at low cost, facilitating a smooth transition into green energy, which is the only viable future of energy generation.

Courtesy: South Asia Journal

Pakistan Stock Exchange posts 29 percent increase in daily traded volume

Having recovered 4.5% in the prior week, benchmark of Pakistan Stock Exchange went back into the red zone during the week ended 28^th April 2017 closing at 49,301. Analysts attribute this fall to new disclosure requirements by SECP, and continued political uncertainty with futures rollover week further aggravating the decline. Average daily traded volumes increased by more than 29%WoW to 359 million shares with volume leaders being EPCL, ASL, ANL, SMBL and TRG. Key news flows during the week included: 1) PSMC unveiling the 1,000cc Celerio (re-branded as the new Cultus) at a ceremony held in Lahore, 2) PPL announcing discovery of 29.2mmscfd gas from its Gambat South block (65% working interest), 3) announcement of Punjab Orange Cab scheme for the unemployed youth by CM Punjab, with expected scheme size of 100,000 units, 4) GoP raising Rs360 billion through auction of short‐term government papers and 5) GoP notifying a relaxation of the moratorium on new gas connections for industrial, commercial and captive power plants directing the gas utilities to implement it with immediate effect. Gainers of the week were AGTL, PSMC, INDU, ASTL and HCAR; while laggards included PPL, EFERT, NCL, NML and CHCC. Foreign participation continued its negative trend with US$10.71 million outflows compared to US$31.97 million in the prior week. With the result season nearing its end, analysts expect the market to remain range-bound amid lack of triggers.

Contrary to February, country's total exports during March'17 rebounded 9.9% MoM/3.4%YoY to US$1.8 billion, where textile exports (60% of total exports) posted marked recovery to clock in at US$1.064 billion up 7%MoM. The upswing in the textile exports in March'17 was primarily driven by 9.9%YoY growth in value added exports to US$775 million, while non‐value added exports declined to US$289 million down 2.5%YoY. On a cumulative basis, 9MFY17 textile exports were still 0.77%YoY lower at US$9.29 billion, largely contributed by 8.5%YoY decline in the low value segment diluting the impact of 2.5%YoY growth in the value added segment. Looking ahead, textile exports are likely to remain under pressure due to: 1) demand side bottlenecks emanating from depressed Chinese demand and slowdown in EU, post Brexit, 2) liquidity crunch faced by textile sector due to delay in tax and rebate refunds amounting to Rs300 billion and 3) continuous upward trend in international and local cotton prices, raising cost of doing business. Having said that, recent appreciation in regional currencies as compared to slight depreciation in the PkR/US$ coupled with Rs180 billion export package, may extend some support to the declining exports, going forward.

Fauji Fertilizer Company (FFC) posted unconsolidated profit after tax of Rs2.19 billion (EPS: Rs1.72) for1QCY17 as compared to net profit of Rs2.73 billion (EPS: Rs2.14) for 1QCY16, down 20%YoY. Earnings came in slightly above market expectation due to 5.4% higher than expected topline on the back of greater than anticipated offtake growth. Key highlights of 1QCY17 earnings includes:  1) a 4%YoY decrease in topline to Rs11.19 billion reflecting 4%YoY expected slowdown in Urea offtake coupled with low urea prices and 2) improvement in gross margin to 31.5% (including subsidy) during 1QCY17 due to low feed gas prices (down 39%YoY) restricting earning decline. Along with results, the company also announced an interim cash dividend of Rs1.50/share.

Indus Motor Company (INDU) reported robust earnings for the 3QFY17 amounting to Rs4.17 billion (EPS: Rs53.05) higher by 41%YoY, beating out estimates and recording its highest earning quarter ever. Stellar earnings were the outcome of: 1) topline growth of 16%YoY, where the deviation may have occurred from higher CBU sales, 2) improved margins of 19.2%, signifying improved margins for the facelift Revo and Fortuner variants and 3) effective tax rate of 30% 1QFY17. On the flip side, finance costs rose 899%YoY due to the late payment on deliveries and below the line expenses increase tapering the bottom-line. Net profit for 9MFY17 rose to Rs10.24 billion (EPS: Rs130.34) up 16%YoY, with total payouts over the period at Rs80/share. Thus the company has a higher payout ratio that added to the planned CAPEX of Rs3.5 billion for FY17, points to improved liquidity at the OEM.

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 closes week almost flat

For the week ended July 22, 2016 the benchmark of Pakistan Stock Exchange PSX-100 closed almost flat as compared to a week ago. The market managed to close above 39,000. However, the overall performance was not disappointing. CYTD returns were reported at above 19 percent. Additionally, the month to date foreign inflow of US$31.7 million is a strong indicator for foreign investments picking pace, following Pakistan’s re‐entry into the EM club.

News flow impacting market during the week included: 1) in the T‐Bill auction conducted on Wednesday, cut‐off yields for 3, 6 and 12 months posted decline, where banks aggressively participated in the auction with bids amounting to Rs740.9 billion against the target of Rs200 billion, 2) net inflow of almost $600 million from China, foreign direct investment (FDI) in Pakistan surged 38.8% as Pakistan received FDI of US$1.28 billion during 2015-16, which was US$358.2 million higher than receipts a year ago.The unusual jump in FDI in the last month of 2015‐16 was on the back of an inflow of US$138.5 million in the telecommunications sector, 3) SECP has formally sent the final draft of the Companies Bill, 2016 to the Ministry of Finance for initiating necessary legislative process and its approval by the Parliament and 4) Textile exports went down by one billion dollars during last financial year due to massive decline in cotton crop production and slowdown in the economy of China pushing Pakistan's textiles and clothing exports to US$12.45 billion during FY16.

Leaders exhibiting performance over the week were: ASTL, NCL, and PSMC (+7.1%WoW), while laggards were FFBL, DAWH and HASCOL. Average daily traded volume grew by 7%WoW to 207 million shares, where SNGP, DFML and PAEL were the volume leaders.

Considering the stellar run‐up in the last quarter of the outgoing FY16 gaining 10.7% during the period), analysts expect the market to enter a consolidation phase. Directionless trading in the absence of major triggers may prevail. Market participants are advised to closely follow: 1) political developments as the opposition plans to protest against inaction on Panama leaks investigations, 2) fertilizer offtake numbers for the month of June'16, gauging the sensitivity of recent subsidies on demand and, 3) details of GoP policy measures in response to the final meeting with the IMF over the release of EFF's last tranche (negotiations start July 27th). Additionally, earnings announcement may fuel strong sentiment for consensus beating stocks.

Firming up in June'16, the global commodity index rose by 3.5%MoM. While losing some ground on account of Brexit and a strengthening US$ as a consequence, oil prices consolidated around US$48/bbl whereas prices of coal were up 6.4%MoM on supply disruptions in major markets and cotton witnessed easing supply concerns depicted strength during the month under review. Steel and Urea prices declined on account of excess supplies amid a weak demand outlook. While recovery has been steady during June’16, most commodity prices still remain at their multi‐year lows. Analysts expect prices to consolidate going forward; however a sustainable reversal of the downtrend remains contingent on an improving demand scenario.

Current Account deficit for June'16 was recorded at US$61 million lower than US$252 million in June'15 (US$792 million in May'16) where higher trade deficit was countered by healthy remittance flow for the month was US$2.07 billion, up 13.8%YoY. This implies, FY16 current account marking a deficit of US$2.52 billion, lower 6.8%YoY reflecting: 1) expanding trade deficit, up +8%YoY as weak exports restricted savings from oil imports, 2) steady remittance inflows (up 6.4%YoY) and 3) US$713 million CSF payments. Going forward, analysts expect slight pressures to mount and project current account to post deficit of US$5.1 billion in FY17 with trade deficit increase of 11%YoY: on 1) US$45/bbl assumption for crude oil and 2) limited recovery in exports on low cost competitiveness. However, positive surprises can emerge if CSF payments materialize (US$900 million approved for next year) and on higher than expected growth in remittances.