PSX benchmark index up 2.76%WoW

Pakistan Stock Exchange (PSX) continued its bullish momentum throughout the week ended on October 04 2024. With expectation of further interest rate cut and IMF’s EFF approval the benchmark KSE-100 index gained 2,240 points or 2.76%WoW to close at 83,532 points.

Overall, the bullish sentiments were driven by high dividend yielding sectors that included Fertilizers and E&P, as falling fixed-income yields led to a rerating of these sectors.

CPI dropped down 6.93%YoY in September 2024 since January 2021. Additionally, in the auction held on October 02, the yields for the 6-month and 12-month T-Bills decreased by 334 and 326 bps, respectively.

Trade balance for September 2024 posted US$1.78 billion deficit.

OMCs’ aggregate offtakes were reported at 1.27 million tons in September 2024, up 20%YoY

As against this cement offtakes for September 2024 were reported at 3.67 million tons, down 5%YoY, largely due to subdued domestic demand amid economic slowdown and higher constructions costs.

Average daily trading volume declined 12.1%WoW to 342.3 million shares, from 389.4 million shares traded a week ago.

Foreign exchange reserves held by State Bank of Pakistan (SBP) increased by US$1.2 billion WoW after the receipt of first trance from the IMF to US$10.7 billion as of September 27, 2024.

The PKR largely remained stable against the greenback throughout the week, closing the week at PKR 277.52 to a US$.

Other major news flow during the week included: 1) Pakistan and Russia ink barter deal to boost agri trade 2) Refineries demand action on key issues before upgrades, 3) Pakistan and Malaysia pledge to deepen ties, 4) IPPs talk status remains under wraps and 5) the GoP buys back PKR351 billion treasury bills.

Textile Spinning, Leather & Tanneries, Oil & Gas Exploration Companies, Fertilizer and Tobacco were amongst the top performers, on the other hand, Modarbas, Vanaspati & Allied Industries, Close-End Mutual Funds, Woollen & Inv. Banks/ Inv. Cos/Securities Cos. were amongst the worst performers.

Major net selling was recorded by Foreigners with a net sell of US$26.1 million. Mutual Funds absorbed most of the selling with a net buy of US$26.1 million.

Top performing scrips of the week were: AIRLINK, NCPL, PKGP, PPL, and FFC, while laggards included: TRG, FHAM, INIL, EPCL, and EFUG.

According to AKD Securities, following the approval of the IMF’s executive board and the subsequent receipt of the first tranche of US$1.02bn, market sentiments are poised for improvement.

Additionally, easing inflation with September 2024 CPI reported at 6.93%YoY, coupled with ongoing monetary easing, is expected to keep equities in focus, with the market trading at an attractive P/E of 3.6x and a DY of 13.1%.

The brokerage house recommends the sectors benefiting from monetary easing and structural reforms, particularly high dividend yielding stocks, which are expected to rerate as yields align with fixed income returns. 

Pakistan's biggest problem: lack of good governance

The matter of grave concern is that Pakistan suffers from three deficits: 1) budget deficit, 2) trade deficit and 3) trust deficit. Though we have listed trust deficit on number three, may economic analysts term it ‘mother of all evils’. The public trust in the ruling regime is at the lowest ebb. That is the reason Pakistan’s GDP growth rate has been hovering around 3 percent for years.

According to the experts the GDP growth rate is low because new investment is scanty, balancing, modernization and replacements are virtually nonexistent. To be honest the existing units face declining capacity utilization, which is leading to closure of the productive facilities.

The ruling regime often take pride in saying, ‘Pakistan is one of the best performing market’. The reality is around 500 companies are listed at the local stock exchange and only a small number of new companies listed is the last one decade. Banks are thriving because of huge investment in the government securities, exploration and production companies make fortune due to high international prices of crude oil, fertilizer plants are working below optimum capacity utilization, country imports huge quantity of refined products because of dismal capacity utilization and the list can continue.

To overcome budget the government has imposed huge taxes on each and every product, including lifesaving drugs and food items. Imposition of petroleum development levy increases power generation cost as well as transportation and logistics cost. High electricity and gas tariff encourage theft, which is evident from ballooning circular debt.

Over the last three years no effort has been made to contain expenditures, which prompts the government to borrow more, to be honest the government borrows to pay off the debt.

To conclude the government is creating new entities, which promise bringing in huge investment. One fails to understand if the existing industries are closing, local entrepreneurs and educated people are leaving the country, why should foreigners select Pakistan as an investment destination? The rulers must remember actions talk louder than words.

Global slowdown impairing Pakistan’s external trade

Pakistan Bureau of Statistics has released its monthly exports and imports numbers for the month of October 2022. The data showed country’s trade deficit shrinking 19.8%MoM and 40.4%YoY during the month under review. On cumulative basis, the trade deficit has eased off by 26.2%YoY during 4MFY23.

The improvement in balance of trade during 4MFY23 largely comes on the back of easing import bill, which has come off by 12.4%YoY during the period under review to clock in at US$21.1 billion. Exports have actually posted a slight increase of 1.1%YoY to settle around US$9.6 billion.

Country’s largest export oriented sector, Textiles and clothing has reported a decline of 1.3%YoY during 4MFY23 and remained at US$5.9 billion as compared to US$6.0 billion during the same period of last year.

Cotton yarn exports registered 27.7%YoY decline in July-October to US$285.315 million as compared to US$394.8 million during the same period last year.

Bed wear exports declined by 9%YoY to US$1.0 billion from US$1.1 billion during the same period.

As against this, Knitwear exports increased by 7%YoY to US$1.7 billion which contained the overall decline in textile exports.

Moving forward, the outlook of textile exports remain hazy owing to unavailability of gas to the sector during winters and a global slowdown expected to impact demand.

Country’s import bill continued to contract, declining by 16%YoY owing to slowdown in economy and high base effect.

The largest declines were registered in the categories of Petroleum and machinery groups imports, posting declines of 47%YoY and 40%YoY respectively and were the key reason for an overall decline in imports.

Food imports grew by 10%YoY during the period under review to US$3.4 billion owing to higher Wheat (local crop destruction) and Palm Oil imports (shift from crude imports to refined imports).

With global economy heading towards a slowdown as the major central banks around the world jack up their interest rates, the quantum of world trade is likely to contract significantly.

The global commodity prices are also likely to ease off significantly which bodes well for Pakistan.

Conversely, the country’s exports will also contract as the country’s largest export oriented industry struggles against the unavailability of gas. Consequently, analysts expect FY23 to close with a CAD of 3% of GDP.

Pakistan Stock Exchange Benchmark Index Inching Towards 52,000 Level

Pakistan Stock market continued its rally ahead of the MSCI EM inclusion announcement with the benchmark index closing at the all‐time high level of 51,751points (gaining 3.81% WoW) for the week ended 12^th May 2017. Investors’ participation improved, evident from average daily trading volumes for the week increasing by 34.6%WoW to over 355 million shares. Major news flows during the week included: 1) the Federal Cabinet approved the Budget Strategy Paper for FY18 targeting 6% GDP growth along with plan to bring down fiscal deficit to 4% of GDP by FY20, believing that PML-N rule may continue post 2018 election, 2) Board of Directors of Pakistan Stock Exchange (PMX) approved the sale of remaining 20% shares of the exchange to the general public through IPO with floor price of Rs28/share, 3) trade deficit widened 40.12%YoY to US$26.5bn in 10MFY17 while remittances declined 2.79%YoY to US$15.596 billion in the same period, 4) budget deficit escalated to 3.7% of GDP in 9MFY17 (3.4% in 9MFY16) indicating that GoP will miss its 3.8% target for the current financial year and 5) cement dispatches during April’17 grew by 1.7%YoY to 3.57 million tons with cumulative 10MFY17 dispatches rising to 33.88 million tons. Major gainers during the week were: AICL, MCB, PPL, POL and NML; while losers were: LOTCHEM, HASCOL, AGTL, HCAR and MEBL. Foreign selling eased slightly with net outflows of US$2.46 million compared to US$19.27 million a week ago. Analysts maintain a positive outlook on market’s performance with Pakistan’s formal graduation to the EM space in the MSCI Semi‐Annual Review to be announced on 15^th of this month. In this backdrop, analysts favor (OGDC, HBL, UBL, MCB, LUCK, PSO, HUBC, ENGRO and NML). Moreover, incoming proposals for the upcoming Budget FY18 are likely to keep investors’ interest robust.

Declining oil prices eroded the global commodity index by 2.1%MoM during April'17. Oil prices declined due to the high stockpiles and abundant supplies despite the OPEC's cut in place. Following on, similar price trend was seen across major commodities with Steel (down 15%MoM on declining Chinese exports amid surging inventory levels), Urea (down 9%MoM on continuous capacity additions) and FAO Dairy index (down 3.3%MoM on account of peaking seasonal production) losing out the most. Cotton prices remained flat on strong demand from cotton importing countries, currently standing at their 3yr high. Going into May'17, oil producers meeting regarding extension of the agreed supply cut holds significant importance with implications spilling on to overall commodity price trend.

The significant rise in current account deficit (2% of GDP in 9MFY17 vs. 0.83% in comparable period) has emerged as a serious concern for the external account. This downward spiral is expected to continue in remainder of the fiscal year, with CAD expected to reach 2.7% of GDP‐ highest since FY09. This revision in CAD estimates is driven by: 1) worsening trade balance (projected decline of 34%YoY in FY17F) and 2) falling remittances (‐1.3%YoY in FY17). In addition, respite from this trend seems unlikely with CAD projected to further widen to 3.8% of GDP in FY18 in line with a growing trade deficit (19.7%YoY in FY18) due to higher petroleum and development‐related imports. This in turn remains a key concern for foreign exchange reserves which are projected to end FY17/FY18 at US$21 billion/US$17.5 billion as compared to US$23.1 billion in FY16), opening room for currency depreciation.

In line with ENGRO's diversification􀆟on strategy to realign towards relatively higher yielding energy vertical, the company through its subsidiary Kolachi Portgen (Pvt) Ltd ‐ KPL (100% stake) has recently filed a tariff petition with NEPRA for approval of US$392.3 million, 450MW (441.77MW net capacity) RLNG based Power Plant at Port Qasim, Karachi. Expected to commence commercial operations by the end of CY19 (27 months construction period from financial close), the project is expected to deliver IRR of 23.5% by transmitting 100% net capacity to KEL under a power purchase agreement (Letter of inter‐LOI issued by KEL) at an expected levelized tariff (at base case ‐ RLNG without compressor) of Rs7.09/KwH for a period of 30-years at 92% load factor.

Pakistan must address structural issues on top priority

Historically Pakistan and International Monetary Fund (IMF) has lived with each other, at times with comfort and at tome with some unease. While the IMF role as ‘lender of last resort’ has helped Pakistan in overcoming economic malice, the loan covenants are often seen by Pakistani’s rather stringent.

Ideally the ruling regime in Pakistan should be more careful in formulation of policies and implementing these in letter and spirit but the overall impression is that the successive governments sooner or later suffer from complacency. It may also be said that political agenda pushes economic agenda in the back ground. Many analysts strongly believe that condoning deviation may not be difficult had appropriate efforts were made. In other words these deviations are the result of not following the ‘IMF Recipe’.

A team of AKD Securities, Pakistan’s leading brokerage house, recently met the IMF Regional Representative for a discussion on Pakistan’s progress on the macro front in the context of the ongoing EFF program. After the meeting it has also released a report that has many takeaways.

While progress on reform agenda so far remains commendable, continued reform implementation post completion of the program was stressed, where energy crisis and low revenue collection continue to rank as high priority issue areas.

The IMF, though cognizant of likely delays, sees room for steady structural changes even post completion of the program based on higher GoP resolve. Benefits of low oil prices and earlier reforms have placed Pakistan in a macro sweet spot with economic indicators marking record levels.

Agreeing with the IMF, AKD team believes this opens room for addressing deeper structural issues that can help Pakistan sustain recent economic gains where key reform areas highlighted were: 1) exports sector revival, 2) tax base expansion and 3) efficient expenditure and resource allocation between federal and provincial governments.      

Key takeaways

Priority on energy and revenue: Key issue areas for reforms that retain the highest priority were Energy and Revenues expansion – both resonated by all participants. Resolution to the country’s energy problems was highlighted, particularly in the context of its impact on industrial growth. Also, revenue collection remains equally crucial where considerable focus should be directed towards structural changes both through a) regulatory/legislative action and b) operational changes in FBR/tax collection mechanisms.

Privatization to slowdown: The privatization program remains on agenda, however it is likely to stretch beyond the current program as political opposition in PIA’s strategic divestment and labor union concerns in case of DISCOs continue to be major hurdles. That said, recent road shows for DISCOs’ sell-off were regarded as a key positive. Analysts expect revision of current timeline in the upcoming IMF review report for December 2015. Moreover, with the current government resorting to populist decisions in the run up to next general elections (expected 2018), the brokerage house highlight heightened risks to PSE sell-offs.

Another program unlikely: With the current program effectively concluding in June 2016, rollover to another program remains unlikely on account of Pakistan’s stable Balance of Position position. However the Fund is likely to remain engaged in a consultative process with the GoP to monitor current program objectives, though without imposition of conditions/targets.

CPEC – lack of clarity lingers: The Fund views the landmark China Pakistan Economic Corridor (CPEC) agreement as largely positive, though details on nature of agreements remain sketchy and are yet to be factored in fiscal expectations/targets. Alongside, infrastructure projects need for investment in export oriented sectors was also noted.