South Asia and MENA Inferno

Are the conflicts real or just to keep arsenal factories running at full capacity?

Over the last more than three years I have written dozens of articles on “Geo Politics in South Asia and MENA”. I have a few premises: 1) the region is reach in agriculture that provides food and raw material for industries, 2) it has huge population which makes it one of the biggest markets, 3) countries located in the region are rich in minerals ‑ from crude oil to precious metals including uranium. That is the reason region remained prime attraction during colonial and cold war eras and it remains the biggest attraction for Fortune-500 Companies, who install and topple governments in the countries located in the region. Super powers also create conflicts, support rebel groups by providing funds and arms to continue ‘proxy wars’, mainly to keep their arsenal factories running at full capacities.

Since I live in Pakistan, my concerns can be priorities as follows: 1) the immediate concern is my country and its immediate neighbors, 2) proxy wars being fought in the regions, 3) hatred being created among groups in the name of cast, creed and religion and 4) wars and atrocities being impose to plunge these countries deeper into poverty and hunger.

Let me begin with Pakistan, while granting independent status to India and Pakistan British Raj let a thorn – Kashmir. Based on the conflict hawks were groomed on both sides of borders, one claiming that India can’t be divided once again on the basis of religion and other insisting that relationship between the two countries can’t be normalized till resolution of Kashmir issue.

Over more than 65 years both the countries have been spending billions of dollars annually to accumulate more and more arms that includes attaining ‘atomic power status’. Had this amount spent on development and welfare of people in both the countries, I am sure by this time the per capita income would have reached US$25,000 as against existing paltry income ranging from US$1,200 to US$2,500.  

For the last four decades Pakistan has been fighting ‘Proxy US War’ in Afghanistan.  The country was dragged in this conflict to contain USSR’s access to warm waters. However, it seems that in the post 9/11 era the US occupation of Afghanistan is to get control on ‘white powder’, which has become the biggest source for purchasing arms and the breeding nursery for mercenaries who indulge in cross border terrorism in Pakistan and Iran. Taliban are the product of United States that fought its Proxy war in Afghanistan and now are fighting against the ruling regimes in many Muslim countries including Pakistan. They have been given different names in different regions but have one common object, spreading anarchy.

India is often projected as: 1) one of the biggest democracies of the world, 2) nonaligned and secular state and 3) regional super power. However, it had extracted benefits during cold war era and even today it is drawing benefits from both United States and Russia in the name of countering expansionism of China. The sitting Prime Minister of India has been alleged for genocide of Muslims and supporting extremist Hindus. India has been very smartly extracting benefits from United States, the most prominent being ‘agreement for nuclear technology for civilian use’ in exchange for deserting Iran-Pakistan-India gas pipeline project.

The United States has been supporting India in creating its hegemony in South Asia and also encouraged it to deal with Somali pirates’ issue. While Pakistan was forced to stop purchase of oil from Iran and construct Iran-Pakistan gas pipeline, India was not only allowed to buy huge quantity of oil but also to help financially/technically in the construction of Chabahar port in Sistan-Baluchistan province of Iran. The two measures were aimed at keeping Pakistan dependent on Middle Eastern oil and undermine importance of Gwadar port. However, it remains a fact Pakistan offers the shortest and the most cost effective route to Central Asia passing through Afghanistan.

Many Pakistanis suspect that militancy and anti-Pakistan sentiments in its Baluchistan province are being created to create justification for the creation of Grater Baluchistan that will comprise one slice each from Afghanistan, Iran and Pakistan. This proposed country will have over 1,200 kilometer long coastal line. This has huge oil and gas reserves, which will come directly/indirectly under the control of United States and the country will also bring transit trade from Pakistan to virtually zero.

Iran faces sanction for more than 35 years, which were eased recently for the reason best known to the developed countries. However, some quarters say it is an attempt to ‘terrify’ Saudi Arabia, which was brainwashed in the past and made to believe that ‘Iran is a bigger threat to Muslims as compared to Israel’. It is on record that Saudi Arabia and Kuwait encouraged Iraq under Saddam Hussain to attack Iran and provided funds to continue this war for nearly a decade. The breach between Saudi Arabia and United States widened when the sole surviving super power refused to attack Syria.

The recent insurgency in Iraq is aimed at splitting it into three feeble countries. After facing most humiliating defeat in Lebanon and Syria, Israel under the patronage of United States is supporting various groups, the most prominent being ISIL. Some analysts say yet another ‘Lawrence of Arabia’ is in making. His forces are stealing Iraqi oil, selling it to other countries and buying arms from the receipts.

Interestingly, the United States is warring countries not to buy oil from ISIL, but some countries are certainly buying it, may be off the record and selling it as ‘their won oil’ in the international markets.  One point is very clear that stolen oil is being used for purchasing arms for encountering ruling regimes in countries located in the region, particularly Iraq and Syria.

Interestingly ISIL claims to be fighting for the rights of Muslims but putting no resistance against Israeli atrocities in Gaza. This gives a reason to believe that ISIL is there to fragment Muslims and make them weaker but not to pose any resistance against plans of CIA and Israeli intelligence agency.

Bestway attains largest cement manufacturing capacity in Pakistan

Bestway Cement having substantial foreign investment has acquired stake held by another foreign investor in Lafarge cement Pakistan. This shows commitment of Bestway Group towards Pakistan. After Bestway attains the largest cement manufacturing capacity in Pakistan, what would be the response of other industry leaders i.e. Lucky and D.G. Khan Cement? Can this acquisition initiate price war? How the other players plan their business plan in post FY18 era when industry achieves maximum capacity utilization? For details visit shkazmipk.com

Pakistan: Sukuk offeres enormous potential

In countries like Pakistan the governments facing shortage of revenue, indulge in borrowing to meet their developmental expenditures. While the conventional banks have been the key beneficiaries of such borrowing, Islamic financial institutions (IFIs) face serious liquidity management problems as these can’t invest in Riba-based instruments like Treasury Bills and Pakistan Investment Bonds. Issue of Sovereign Ijara Sukuk and corporate Sukuk on one hand offers an opportunity to invest in Riba-free instruments and on the other hand opens a venue for IFIs to manage their liquidity in a more prudent manner. Over the years the Government of Pakistan (GoP) has successfully mobilized funds for the infrastructure project and the latest being mobilization of over Rs49 billion equivalent to US$495 million though another Ijarah Sukuk.

Through this Sukuk the State Bank of Pakistan (SBP) has mobilized funds against M-3 Motorway for a period of three years. This is the first Sukuk that has been issued during the current fiscal year (2014-15). M-3 is a 52 kilometer long strip of motorway situated in Punjab that connects Faisalabad with M-2 near Pindi Bhattian.

This Sukuk has been issued in accordance with the provisions of the Ijara Sukuk Rules 2008. As per transaction mechanism, profit on the GOP Ijara Sukuk will be based on the rental rate benchmarked against the latest weighted average yield of the 6 month Market Treasury Bills or 6-month PKRV (as per FSCD circular 13 dated September 06, 2008). In addition, the rental rate as mentioned may be adjusted based on the difference between estimated supplementary rental and actual maintenance expenses of the underlying asset.

Further, it was also decided that for this particular issue of Sukuk (M-3), the total auction participation of a single Primary Dealer (PD) would be capped at Rs 25 billion or 20 per cent (whichever is the lower) of Total Demand and Time Liabilities-Islamic (excluding FE-25 deposits) of the respective PD Islamic bank / Islamic window of that particular PD. For this purpose, Total Demand and Time Liabilities-Islamic as of 28th March, 2014 were used. The central bank also reserved the right that in case any PD breached the aforesaid limit, it could cancel all or some of the bids of the bank concerned.

The Islamic Banking Department of SBP shall be responsible for monitoring: 1) proper execution and 2) the legal documentation as per approved Shariah structure, to ensure Shariah compliance and seamless management throughout the tenor of the Sukuk and at the time of maturity of the Sukuk. The SBP has advised all the designated PDs for the Sukuk to ensure meticulous compliance with the instructions issued.

Sukuk is an alternative Islamic finance instrument for conventional bonds. This is a certificate that represents ownership in underlying real asset(s). Islamic law does not permit interest and hence conventional coupon paying bonds are impermissible as per Islamic law. However, Islamic law allows sale and lease of real assets and the resulting income in the form of profit on sale or rental income stream on lease of assets. Holders of Sukuk share the lease or profit income generated from the ownership of real assets that the Sukuk certificate represents.

Sukuk has emerged as an instrument of choice after 2008 financial crisis. Not only Muslim countries, but non-Muslim majority countries are also taking interest in it. UK treasury has issued a Sukuk worth £200 million. It became the first sovereign state outside the Muslim world to issue an Islamic bond.

In Pakistan, capital markets are not as developed and most of the formal sector financing takes place through banks. Due to political instability and policy inconsistency, usually, the long term investments are not very popular among the investors. In the last few years, only a handful of IPOs had been made. The bond market is also very small and dominated by sovereign issues than corporate bonds.

While investors had found comfort with bank investments even though these do not offer inflation beating returns, most savers with adequate risk apatite look to invest in secondary market for equities. Karachi Stock Exchange has been offering immaculate that encourages investors to invest in liquid stocks for parking their surplus money.

There are many reasons why corporate bond market did not develop as per expectations in Pakistan. The national savings scheme instruments issued by the GoP offer very attractive yields and these are almost risk free. Some national saving scheme instruments are also tax-free and hence after-tax yield on such instruments are even higher as compared to the corporate bonds.

In Pakistan, prior to the latest issue, 78 Sukuk had been issued amounting to Rs 637.43 billion. Out of these 32 Sukuk issues of Rs 100.10 billion have been fully redeemed. The GoP had issued Ijarah Sukuk in the past to meet its escalating borrowing requirements. Entities like Water & Power Development Authority (WAPDA) and Sui Southern Gas Company Limited (SSGC) had also issued Sukuk in past. Karachi Shipyard and Engineering Works also issued an Ijarah Sukuk in 2007.

Sovereign Ijarah Sukuk issued by the GoP have been structured in such a way that it allows the government to utilize surplus liquidity of IFIs. The Sukuk holders are also able to earn Shariah compliant income. It also facilitates Islamic banks to manage their liquidity as well as meet statutory liquidity requirement stipulated by the central bank of Pakistan.

Within the corporate sector, Sitara Chemical Industries Limited, Wateen Telecom, Engro Chemicals, Dawood Hercules, Century Papers & Boards, Attock Generation, Arzoo Textile, Liberty Power, Amreli Steels, Eden Builders, Quetta Textile, Pakistan American Fertilizers, PEL and Kohat Cement are some of the companies that had issued Sukuk in past. Out of these, only one private sector entity Maple Leaf Cement defaulted on Rs8 billion Sukuk in 2009.

Recently, K-electric (formerly KESC) issued Rs6 billion Sukuk that were to be listed Karachi and Lahore stock exchanges. There was no Pre-IPO placement and the entire amount of Sukuk issue was offered to retail investors and it was fully subscribed in a matter of few hours.

Through issue of more Sukuk, the investment class assets universe will expand and it will also enable those seeking Riba-free return to effectively diversify their portfolios. Treasuries of Islamic banks will also have an expanded set of investment avenues. It will increase liquidity of these Sukuk and generate wider interest among all investors in the economy to consider investing in these investment vehicles.

Moody’s improves Pakistan outlook

Moody's has revised the outlook on Pakistan's foreign currency rating to Stable from Negative, with the move occurring post a "stabilization in the country's external liquidity position." This does not come as completely unexpected. Pakistan's total foreign exchange reserves have risen to a 2-year high of US$14.6 billion and exchange rate parity also improved by 6.7 percent CYTD against US Dollar.

With the outlook change having the potential to act as a self-fulfilling prophecy, analysts expect further improvement in rating. This should facilitate the valuation rerating process where the KSE-100 Index still trades at a forward P/E of 8.0x, at a discount of 18% to its average 7-year P/E multiple of 9.4x.  Pakistan’s leading brokerage house AKD Securities forecast June'15 Index target at 35,000 points.
The rationale to revise the outlook is "primarily based on stabilization in the country's external liquidity position supported by the GoP's strong commitment to reforms under an ongoing program with the IMF."

In the near-term, this vote of confidence from Moody's may encourage State Bank of Pakistan (SBP) to lower discount rate, although analysts still maintain that the central bank may choose to follow a cautious approach keeping in view geopolitical risks to international crude oil prices.

After offering a muted 0.18% return, the KSE-100 Index gained 1.32% on Monday after news came that Moody's has raised the outlook for Pakistan's foreign currency rating. This underpins the view that the valuation rerating process has room for further improvement and prospects for medium-term triggers such as a credit ratings upgrade and upgrade to MSCI Emerging Markets have improved. 

China the biggest buyer of Iranian oil

China, Tehran's largest oil client, has since late 2013 been stepping up purchases after a landmark November nuclear deal eased some sanctions on Iran and has been making up the main portion of stronger Asian imports since then.

China's Iranian crude imports rose by more than a third in May to the second highest on record, helping keep overall Asian buying above the level allowed under a deal that eases some Western sanctions, government and tanker-tracking data showed.

Iran's biggest buyers - China, India, Japan and South Korea - together bought 1.26 million barrels per day from the Islamic republic last month, up 8 percent from the same period a year ago, government and tanker-tracking data showed.

For the first five months of 2014, the aggregate imports averaged 1.25 million bpd, up 25.3 percent from a year ago, keeping Tehran's exports above one million bpd cap that it agreed under a deal with the West for six months to ending July 20, 2014.

There are no indications that Washington will loosen up on the cap until a full nuclear deal with Tehran is reached, but there have been some signs of improving ties, including on how to respond to an Islamist militant insurgency in northern Iraq.

There are concerns about unrest in Iraq that may disrupt oil supplies, but some importers consider Iranian supplies more stable than Iraqi crude.

Tough western sanctions since 2012 had slashed Iran's oil exports and crippled its economy by choking the flow of foreign exchange, but some of those measures were relaxed in November last year after a  diplomatic deal in return for Tehran curbing its nuclear activities and shipments have been up from last year.

Asian buying volumes have held consistently above 1.1 million bpd since January - excluding oil going to other destinations such as Turkey and Syria - indicating the six-month export target will be missed.

Iran's total crude loading also seem to have rebounded in May back up to about 1.38 million bpd, according to sources who track tanker loadings.

Iranian crude imports by China expanded 36 percent in May 2014 from a year ago to the second highest on record of 757,900 bpd, pushing up its average imports for January-May higher to nearly 50 percent on a year earlier.

India's imports fell 0.6 percent to 255,200 bpd in May from a year ago, but its intake in the first-five months of the year still was up 37.7 percent at 310,500 bpd.

South Korea's imports fell 43.3 percent from a year ago to 66,500 bpd of Iranian crude for the month. Shipments to Japan - the last of the four to report its oil intake - fell by 23.7 percent to 181,892 bpd last month.

Secondary Public Offer of Pakistan Petroleum Likely to Get Enormous Response

According to a report by one of Pakistan’s largest and most trusted brokerage house, AKD Securities, sale of 70 million shares of Pakistan Petroleum (PPL) is likely to be completed before June 30 2014. The familiarity with the process can potentially lead to the strike price coming much higher than the floor price.          .

At present, the Government of Pakistan (GoP) holds 1.4 billion shares of PPL which translates into a 71% stake in the Company. The GoP intends to raise PkR15bn (US$150mn) by offloading 5% (70 million shares) of its holding in PPL.

In recently concluded transaction of sale of shares of United Bank Limited (UBL), the floor price was set close to the stock's 6-month average price (PkR155/share). Based on the same benchmark PPL’s 6-month average price comes to PkR215.4/share. However analysts do not rule out a further discount on this in setting PPL's floor price, a case may be made for the strike price settling much higher than was the case for UBL.

This is because PPL's is a smaller transaction and will be carried out by local book runners using methodologies that were used for EFERT and AVN for example. At current levels, PPL trades at a FY15F P/E of 6.8x and D/Y of 5.9% - attractive multiples that merit a subscribe stance particularly if the floor price is set at a 5 to 10 percent discount to market price.    

After raising US$313 million and a further PkR7.62 billion from UBL's stake sale, the GoP intends to raise US$150 million by selling 5% of its stake in PPL which translates into 70 million shares.

Taking cue from the UBL transaction, the floor price is likely to be close to the 6-moonth average share price PkR215.4/share in case of PPL. However, considering the current share price hovering around PkR210, a further discount to the 6-month average share price appears likely.

In this regard, a 5% discount to the 6-month average price results in a tentative floor price of PkR205/share. This translates into a FY15F P/E of 6.6x while last closing price implies a forward P/E of 6.8x. These stack up well against the broader market's forward P/E of 7.9x.

While analysts await the transaction's formal details, those privy to the details believe PPL transaction could be similar to that of Engro Fertilizer and AVN, run by a local book runner with the color of the book being visible at all times.

Analysts believe that while the onus of participation may be on local investors, foreign investors will be free to participate as well. Presently, PPL has free float of 21%, which translates into 410 million shares. Out of this, 24% is held by foreign institutions which include Lazard Ltd., Invesco Ltd., Robeco AMC and Tundra Fonder amongst whom Lazard Ltd. has the largest declared shareholding (as far as free float number of shares are concerned) holding 18.3% of the total free float, while remaining are with local participants.

Foreign investors have clearly been keen on PPL in the past and this could manifest at the time of the book building. At the same time, PPL remains an attractively valued stock and is likely to result in strong local interest.

In UBL transaction, despite international and local interest, the strike price inched up by mere 2% against the floor price of PkR155/share. Analysts believe this was mainly due to the sheer size of the transaction.

Analysts believe the same might not be the same in case of PPL due to: 1) the size of the PPL transaction being roughly two-fifths that of UBL where a small size also means less supply concerns, 2) a 76% of PPL's free float with local investors, which limits the number of shares that can be acquired through the market, without affecting the price and 3) PPL's book building is being done by the local book runner who will be using similar methodologies that were used in recent book buildings.

This familiarity with the process can potentially lead to the strike price coming much higher than the floor price.          .

Pakistan: Divestment of Government Holding in Pakistan Petroleum

In an attempt to accelerate privatization process in Pakistan, the incumbent government had decided to divest its holding in UnitedBank Limited (UBL), Pakistan Petroleum Limited (PPL), Oil and Gas DevelopmentCompany Limited (OGDC) and other state owned enterprises (SoEs).

The recent offer to divest the Government of Pakistan (GoP) holding in United Bank Limited (UBL) attracted enormous response as the amount received was almost twice the initial estimate. Sale of 19.8 percent shares of UBL was through a book building process. The deal was struck at US$387 million, of which 80 percent shares on offer went to foreign investors, which helped GoP in mobilizing around US$310 million. The proceeds have already been received by the GoP on June 20, 2014. More than 40 leading global equity funds, including Templeton, Wellington, Everest, Lazard, Morgan Stanley, Blackrock and others, participated in this transaction.

Encouraged by the outcome, the GoP has decided to divest over 70.05 million shares out of its holding in Pakistan Petroleum Limited (PPL). The offer would be open to both international and domestic institutional investors and high net worth individuals through a book building process, to be completed in the last week of June 2014. It has also been approved to offer 7 million shares to the general public with preference to existing employees of PPL through a subsequent subscription process within next few months.

PPL has been a frontline player in the energy sector since mid fifties. As a major supplier of natural gas, PPL today contributes over 20 percent of the country’s total natural gas supplies besides producing crude oil, Natural Gas Liquid and Liquefied Petroleum Gas.

The company’s history can be traced back to the establishment of a public limited company in June 1950, with major shareholding by Burmah Oil Company (BOC) of the United Kingdom for exploration, prospecting, development and production of oil and natural gas resources.

In September 1997, BOC pulled out itself from exploration and production worldwide and sold its equity in PPL to the GoP. Subsequently, the government reduced its holding through an initial public offer in June 2004, which was further decreased with the initiation of the Benazir Employees Stock Option Scheme (BESOS) in August 2009 when PPL employees were allotted 12 percent shares from the government’s equity.

Currently, the company’s shareholding is divided among the GoP, which owns about 71 percent, PPL Employees Empowerment Trust that has approximately 7 percent — being shares transferred to employees under BESOS — and private investors hold nearly 22 percent.

Lately, PPL has acquired 100 percent shareholding of MND E&P Limited, a company incorporated in England and Wales. The name of the subsidiary has been changed to PPL Europe E&P Limited. It has also established a wholly-owned subsidiary, PPL Asia E&P B.V. with corporate seat in Amsterdam, Kingdom of Netherlands. The subsidiary will focus on exploration and production of oil and gas in the region. PPL has assigned its interest in Block 8, Iraq, under the Exploration, Development and Production Service Contract with Midland Oil Company, Iraq to PPL Asia E&P B.V.

PPL operates six producing fields across the country at Sui (Pakistan’s largest gas field), Adhi, Kandhkot, Chachar, Mazarani and Hala and holds working interest in fifteen partner-operated producing fields, including Qadirpur the country’s second largest gas field.

PPL together with its subsidiaries has a portfolio of 47 exploration assets of which the company operates 27, including one contract in Iraq, while 20 blocks, comprising three offshore leases in Pakistan and two onshore concessions in Yemen, are operated by joint venture partners. 

Daily gas production of PPL from its operated and partner-operated fields stands at around one billion cubic feet (bcf) of gas per day, which translates into over 20 percent of the country’s total gas production. The company’s major clients are Sui Southern Gas Company Limited (SSGCL), Sui Northern Gas Pipelines Limited (SNGPL) and Water and Power Development Authority.

On March 31, 2014, PPL’s proven recoverable reserves were 2.267 trillion cubic feet (Tcf) of natural gas, 40.293 million barrels (MMbbl) of oil/ NGL and 412,557 tonnes (tons) of LPG.