Ijara Sukuk: Pakistan’s central bank performs first ever OMO

Lately, State Bank of Pakistan (SBP) has announced to conduct open market operation (OMO) of Ijara Sukuk and the first ever outright purchase (Bai Muajjal) of Government of Pakistan Ijara Sukuk-9 (GIS) was performed on October 23 2014.

In the first ever outright purchase of Sukuk the central bank accepted bids amounting to Rs6.175 billion. Islamic banking institutions (IBI) aggressively participated in the OMO. Overall, the central bank received 16 offers amounting to Rs45.575 billion, which included three offers for 6-month and some 13 for 12-month period.

Offers for 6-month amounted to Rs3 billion with price ranging from Rs108.3753 to Rs108.3856, while for 12-month Rs42.575 billion worth bids were submitted with price ranging from Rs113.3689 to Rs113.8220.

As per transaction modalities for OMOs for GoP Ijara Sukuk announced by the SBP, all Islamic banks and conventional banks having Islamic branches were eligible to participate in the OMO.

Out of the received bids, the SBP accepted offers amounting to Rs6.175 billion. This includes all 6-month bids at a deferred price of Rs108.3856 and some four bids for 12-month period amounting to Rs3.175 billion at a deferred price of Rs113.5572.

A week earlier, the central bank announced that it will initiate outright trade of GIS through OMOs to facilitate Islamic Banking Industry (IBI) for liquidity management as for the last few years, the banks are facing a severe challenge of liquidity management with an excess liquidity and limited investment opportunities.

Industry sources said the issuance of new GIS is on a slow track and previous Sukuks are being matured gradually. Presently, the Islamic Banking Industry has some Rs80 billion to Rs90 billion surplus liquidity in the system and in order to facilitate IBI in its liquidity management and more effective transmission of monetary policy, the SBP decided outright purchase or sale of GIS through OMOs based on multiple price competitive bidding auction process.

The offered three-year GIS-9 was launched in 2011 and is expiring on 26^th December 2014. The purchase of GIS on deferred payment by SBP has provided an opportunity to the IBI to invest Rs6 billion till expiry.

Although, the IBI aggressively participated in the first OMO, these were disappointed over the accepted bids. They say as the market has surplus liquidity, the accepted amount should have been higher.

Bankers said the sold off GIS will be transferred to the SGLA of the buyer on the deal date, while payment will be made on deferred payment date and banks cannot include the GIS in their SLR calculations from the deal date.

Pakistan Petroleum quarterly profit up by 10 percent

Pakistan Petroleum Limited (PPL) has announced its 1QFY15 financial results posting profit after tax of Rs13.69 billion (EPS: Rs6.94) as compared to net profit of Rs12.48 billion (EPS: Rs6.33) for 1QFY14, registering a growth of 10%YoY. Major factor responsible for 1QFY15 earnings growth remained 11%YoY increase in revenue.

This growth in revenue was underpinned by expected 35%YoY increase in production coming in from Tal block, which is likely to have boosted company’s crude oil production up by 22% to 14,200 barrels per day (bpd) as compared to 11,600 bpd for 1QFY14.

Key result highlights include: 1) lower effective tax rate at 30.4% in 1QFY15 as compared to 33.7% during the same period FY14 and 2) operating margins shrinking to 59.9% for 1QFY15 due to 29%YoY increase in field expenditures.

 

 

OGDC first quarter profit to decline

The Board of Directors of Oil and Gas Development Company Limited (OGDC) is scheduled to meet on 24^th October to review financial results for 1QFY15. According to AKD Securities OGDC is likely to post profit after tax of Rs32.4 billion (EPS: Rs7.54) for the quarter, down by 3%YoY as compared to net profit of Rs33.6 billion (EPS: Rs7.81) posted for the corresponding quarter last year. Despite the expected 3%YoY and 2%YoY increase in oil and gas production, OGDC's earnings are expected to remain subdued due to 1) appreciation of Pak Rupee against the US$ by 3%YoY, 2) sharp fall in international oil prices and 3) expected 30% decline in other income. Better production flows from Tal block remained the main impetus behind augmented oil and gas production. Topline of the Company is expected to grow by 3%YoY due to 5%YoY decline in average crude oil prices responsible for the relatively sluggish topline growth despite increase in production. During the period under review crude oil prices were realized at US$103.4/bbl as against US$108.6/bbl for 1QFY14. OGDC has shed 16.5%CYTD in response to both lower international oil prices and delay in the sale of Government of Pakistan (GoP) stake. Analysts expect some stability in the stock price with successful completion of its secondary offer. OPEC is scheduled to meet in November and any positive development on the oil pricing front in that meeting can prove to be a near-term price catalyst for the scrip. 

Multilateral Lenders: Delivery or Delusion

The prime purpose behind the creation of multilateral financial institutions was reconstruction in the aftermath of World War II by providing funds and technical assistance to war-affected countries. The objective for the creation of the International Bank for Reconstruction and Development (IBRD) – the original institution of the World Bank Group – was to reduce poverty in middle-income and creditworthy poor countries by promoting sustainable development through loans, guarantees, risk management products and analytical and advisory services.

The World Bank is a vital source of financial and technical assistance to developing countries around the world. It is not a bank in the ordinary sense as it enjoys partnership with almost every country for reducing poverty and support development. The World Bank Group comprises five institutions which are: 1) International Bank for Reconstruction and Development, 2) International Development Association (IDA), 3) International Finance Corporation (IFC), 4) Multilateral Investment Guarantee Agency (MEDA) and 5) International Centre for Settlement of Investment Disputes (ISID). Together, the IBRD and the IDA make up the World Bank.

The World Bank Group has set two goals to be achieved by 2030: to end extreme poverty by decreasing the percentage of people living on less than US$1.25 a day to no more than 3 percent and to promote shared prosperity by fostering the income growth of the bottom 40 percent of every country. However, the real concern is that although poverty has declined rapidly over the past three decades – even according to the World Bank itself – humanity continues to face urgent and complex challenges. More than one billion people still live in deep poverty, a state of affairs that is morally unacceptable given the resources and technology available today. At the same time, rising inequality and social exclusion seems to accompany rising prosperity in many countries. Under these circumstances, the World Bank's overarching mission of a world free of poverty is as relevant today as it has ever been.

The International Monetary Fund (IMF) is also an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth and reduce poverty around the world. The IMF was conceived in July 1944, when representatives of 45 countries agreed on a framework for international economic cooperation to be established after the Second World War. They believed that such a framework was necessary to avoid a repetition of the disastrous economic policies that had contributed to the Great Depression. The IMF came into formal existence in December 1945, when its first 29 member countries signed its Articles of Agreement. It began operations on March 1, 1947. Later that year, France became the first country to borrow from the IMF.

The IMF has played a part in shaping the global economy since the end of World War II. Broadly speaking, its history can be divided into the long years of cooperation and reconstruction (1944-71), the end of the Bretton Woods System starting in 1972–81, the debt and painful reforms (1982–89), the societal change for Eastern Europe and Asian upheaval (1990–2004) and globalization and the crisis that started in 2005, which continues till today.

The job of rebuilding national economies began at the end of the Second World War. The IMF was assigned the responsibility for overseeing the international monetary system to ensure exchange rate stability and encourage members to eliminate exchange restrictions that hinder trade. During the Great Depression of the 1930s, countries raised barriers to foreign trade, devaluing their currencies to compete against each other for export markets and curtailing their citizens' freedom to hold foreign exchange. These attempts proved self-defeating. World trade declined sharply while employment and living standards plummeted in many countries.

The breakdown in international monetary cooperation led the IMF's founders to plan an institution charged with overseeing the international monetary system – the system of exchange rates and international payments that enables countries and their citizens to buy goods and services from each other. The new global entity was assigned the mandate to ensure exchange rate stability and encourage its member countries to eliminate exchange restrictions that hindered trade.

The countries that joined the IMF between 1945 and 1971 agreed to keep their exchange rates (the value of their currencies in terms of the U.S. dollar and, in the case of the United States, the value of the dollar in terms of gold) pegged at rates that could be adjusted only to correct a "fundamental disequilibrium" in the balance of payments, and only with the IMF's agreement. This system, known as the Bretton Woods system, prevailed until 1971, when the U.S. government suspended the convertibility of the dollar (and dollar reserves held by other governments) into gold.

In August 1971, U.S. President Richard Nixon announced the "temporary" suspension of the dollar's convertibility into gold. While the dollar had struggled throughout the 1960s within the parity established at Bretton Woods, this crisis marked the breakdown of the system. An attempt to revive the fixed exchange rates failed, and by March 1973, all major currencies began to float against each other. Since the collapse of the Bretton Woods system, IMF members are free to choose any form of exchange arrangement they wish (except pegging their currency to gold): allowing the currency to float freely, pegging it to another currency or a basket of currencies, adopting the currency of another country, participating in a currency bloc or forming a part of a monetary union.

The IMF responded to the crisis emerging from the oil price shock of the 1970s by adapting its lending instruments. To help oil importers deal with the anticipated current account deficits and inflation in the face of higher oil prices, it set up the first of two oil facilities. From the mid-1970s, the IMF respond to the balance of payments difficulties confronting many of the world's poorest countries by providing concessional financing through what was known as the Trust Fund. In March 1986, the IMF created a new concessional loan program called the Structural Adjustment Facility. The SAF was succeeded by the Enhanced Structural Adjustment Facility in December 1987.

The fall of the Berlin Wall in 1989 and the dissolution of the Soviet Union in 1991 enabled the IMF to become a (nearly) universal institution. In three years, membership increased from 152 countries to 172. The IMF played a central role in helping the countries of the former Soviet bloc in their transition from central planning to market-driven economies. This kind of economic transformation was never attempted before and the process was less than smooth at times. For most of the 1990s, these countries worked closely with the IMF, benefiting from its policy advice, technical assistance and financial support. By the end of the decade, most economies in transition had successfully graduated to market economy status after several years of intense reforms, with many joining the European Union in 2004.

In 1997, a wave of financial crises swept over East Asia, from Thailand to Indonesia to Korea and beyond. Almost every affected country asked the IMF for both financial assistance and for help in reforming economic policies. Conflicts arose on how best to cope with the crisis, and the IMF came under criticism that was more intense and widespread than at any other time in its history.

From this experience, the IMF drew several lessons that altered its responses to future events. First, it realized that it would have to pay more attention to weaknesses in the banking sector of different countries. In 1999, the IMF – together with the World Bank – launched the Financial Sector Assessment Program and began conducting national assessments on a voluntary basis. Second, the Fund realized that the institutional prerequisites for a successful liberalization of international capital flows were more daunting than it had previously thought. Along with the economics profession generally, the IMF dampened its enthusiasm for capital account liberalization. Third, the severity of the contraction in economic activity that accompanied the Asian crisis necessitated a re-evaluation of how fiscal policy should be adjusted when a crisis was precipitated by a sudden stop in financial inflows.

The implications of the continued rise of capital flows for economic policy and the stability of the international financial system are still not entirely clear. The current credit crisis and the food and oil price shock are clear signs that new challenges for the IMF are waiting just around the corner. For a long time international capital flows fueled a global expansion that enabled many countries to repay money they had borrowed from the IMF and other official creditors and to accumulate foreign exchange reserves.

The founders of the Bretton Woods system had taken it for granted that private capital flows would never again resume the prominent role they had in the 19th and early 20th century and the IMF had traditionally lent to members facing current account difficulties. The latest global crisis uncovered fragility in the advanced financial markets that soon led to the worst global downturn since the Great Depression. Suddenly, the IMF was inundated with requests for stand-by arrangements and other forms of financial and policy support.

With broad support from creditor countries, the Fund’s lending capacity was tripled to around US$750 billion. To use those funds effectively, the IMF overhauled its lending policies, including by creating a flexible credit line for countries with strong economic fundamentals and a track record of successful policy implementation. Other reforms, including ones tailored to help low-income countries, enabled the IMF to disburse very large sums quickly, based on the needs of borrowing countries and not tightly constrained by quotas, as in the past.

If one reviews the stated objectives and actual performance of the IMF, there is a wide difference. This disparity could be attributed to changing foreign policy objectives of the developed nations and their greed to control the global economy and productive resources, particularly energy resources. This could be best understood if one examines the prevailing situation in South Asia, Middle East and North Africa (MENA) in the aftermath of 9/11, especially attacks on Afghanistan and Iraq with the consent of the UN. The recent agreement arrived by 5+1 developed countries with Iran created hopes for easing tensions but the disputes remain there.

To understand the role played by the World Bank and the International Monetary Fund (IMF) with specific reference to Pakistan, which has remained the focus of the U.S. foreign policy starting from the Cold War era to the ongoing war on terror being fought in Afghanistan for more than a decade, one has to consider a few important points.

The developed countries that talk about promotion of democracy and at times participate in ‘regime change’ exercises supported two military rulers General Zia-ul-Haq and General Pervez Musharraf in Pakistan. The country was facing economic sanctions at the time Pervez Musharraf dismissed the elected government of Nawaz Sharif.

As the UN approved the NATO attacks on Afghanistan, Pakistan was assigned the role of a ‘frontline partner in the war on terror’ and most of the sanctions were removed. It was not surprising because the jihad in Afghanistan was fought from Pakistan with the help of religious parties that parented the Taliban, which later became the worst foe. Pakistan was then asked to eradicate the Taliban.

Another military ruler Field Marshal Mohammad Ayub Khan ruled Pakistan for nearly ten years and celebrated ‘the decade of reforms’ because during his regime almost all the multilateral donors extended aid, grants and soft-term loans to Pakistan. In that period, Pakistan’s GDP size and its growth rate was even better than some of the most prosperous countries.

Against that time, the 1990s is often termed as the lost decade because Pakistan went through the worst economic crisis during this period. Each elected government of Benazir Bhutto and Nawaz Sharif was dismissed twice. These dismissals refreshed the memories of the dismissal of Zulfikar Ali Bhutto’s government in the 1970s and his subsequent hanging. During the rule of Zulfikar Ali Bhutto, the Muslim world witnessed the rise of the Organization of Islamic Conference, which was not approved and two of its founders, King Faisal of Saudi Arabia and Zulfikar Ali Bhutto met unfortunate deaths.

This raised the suspicion that the global and regional superpowers certainly didn’t approve of the emergence of new economic powers, particularly in South Asia, the Arabian Peninsula and North Africa. Yet another victim that has been enduring economic sanctions for the last three decades is Iran. The bottom line is that financial assistance is driven by the foreign policy of the global and regional superpowers.

This article was originally printed in SOUTHASIA http://www.southasia.com.pk

 

Pakistan enjoys unique position in South Asia

The term South Asia commonly refers to seven countries namely: Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. These countries are also part of South Asian Association for Regional Cooperation (SAARC), a bloc established in 1985. Afghanistan has been included as 8th member of SAARC in 2006 and China, Iran and Myanmar are also seeking full member status of the bloc.

According to various reports SAARC member countries have millions of acres of cultivable land, reasonably robust agriculture and manufacturing base, but very large percentage of population of these countries lives below the poverty line. Often South Asia is termed the poorest region in the world after Sub-Saharan Africa. While over a quarter of the world's poor people live in Africa, half of them live in South Asia. According to a report there are more poor people in eight Indian states than in the 26 poorest African countries.

According to a World Bank report released in 2007, South Asia was the least integrated region in the world. Trade among countries in the region is around 2% of the region's combined GDP, compared to 20% in East Asia. According to some analysts due to similar climatic conditions, soil composition and mindset of ruling junta these countries still compete with each other in the global markets. Despite enjoying close proximity and often common borders, these countries have failed in complementing each other due to hostilities against each other.

Three of the largest countries by population, Bangladesh, India and Pakistan have elaborate agriculture and manufacturing base but hardly enjoy cordial diplomatic relations. This virtually closes down doors for economic cooperation, particularly sectors like agriculture, manufacturing and even services. One of the reasons for the prevailing situation is ‘trust deficit’ as the hawks present in these countries try to portray that economic cooperation among the member countries will make the smaller countries subservient to the those having rather robust economy.

All the countries of the region suffer from acute shortage of energy products, the lifeline of economy. A closer look at the power generation potential, installed capacities and actual output one could say without mincing words that the energy crisis looming for nearly three decade is the outcome of following inconsistent policies and gross mismanagement. Below optimum capacity utilization of power generation capacity is partly due to non-availability of fuel and partly because of inadequate maintenance of the power plants but poor cash flow is the mother of all evils.

Pakistan has an aggregate installed electricity generation capacity of nearly 30,000MW but average output hovers around 15,000MW or 50 percent capacity utilization. Equally shocking is the news that India also suffers from the same contentious problem. The third largest economy of the world has an aggregate installed generation capacity of 250,000MW but actual generation hovers around 150,000MW. A point that distinguishes two countries is that while efforts are being made in India to overcome looming energy crisis, little effort is being made in Pakistan.

One can just forget two of the gas pipeline projects Iran-Pakistan-India (IPI) and Turkmenistan-Afghanistan-Pakistan-India (TAPI). Both the pipelines were aimed at catering to Indian gas requirement but Pakistan was to benefit in two ways: 1) getting millions of dollars transit fee and 2) also gas for meeting domestic requirements. It was believed that after easing of economic sanctions on Iran, Pakistan will succeed in completing portion of gas pipeline located in its territory. However, it seems that Government of Pakistan (GoP) does not wish to complete this project due to the US pressure. Fate of TAPI is also in doldrums as NATO forces are likely to vacate Afghanistan in 2014. Therefore, Pakistan will have to accelerate oil and gas exploration activities in the country and also complete LNG project on war footings.

Pakistan is a natural corridor for energy supply because on one side are energy-rich countries and on the other side are energy-starved ones. Pakistan can also follow Singapore example and establish state-of-the art refineries on the coastal belt. In this regards help can be sought from China, Russia and other Central Asian countries. Pakistan already has a mid-country refinery and two pipelines to carry black and white oil products up to Multan. This can pave way for export of white oil products to Afghanistan and Chinese cities enjoying common border with Pakistan. Realization of all these projects can help the country in earning millions of dollars transit fee.

Ironically, Gwadar port project has been put on back bumper after the departure of Pervez Musharraf. In fact the paraphernalia should have been completed prior to transfer of management control to China. Though, India is facilitating in the construction of Chabahar port in Iran, Pakistan will continue to offer shortest and most cost effective route up to Central Asian countries passing through Afghanistan.

Lately, some of the Middle Eastern countries have shown keen interest in acquiring agriculture land in Pakistan but local feudal lords have emerged to be the biggest opponents to leasing of cultivable lands to other countries. Pakistan has millions of acres of land which is not cultivated, mainly due to shortage of irrigation water. Leasing out land to other countries is not a bad proposal because it would help in improving the infrastructure i.e. construction of farm to market roads, and modern warehouses. Construction of water courses and installation of tube wells would have helped in raising sub-soil water levels in arid zones.

Pakistan produces huge quantities of wheat, rice, sugar, fertilizer but a significant portion of these commodities is smuggled to neighboring countries. Plugging of porous border and formalizing trade with India, Iran and Afghanistan can increase Pakistan’s export manifold. It is estimated that nearly one million tons wheat and half a million tons rice and sugar each is smuggled to the neighboring countries.

The increase in lending to farmers has started yielding benefits with Pakistan joining the club of wheat exporting countries. The recent initiative of State Bank of Pakistan, Warehouse Receipt Financing and trading of these receipts at Pakistan Mercantile Exchange is likely to improve earnings of farmers, though reduction in wastage and better price discovery. It is encouraging that British Government has offered assistance equivalent to Rs240 million to complete the project at a faster pace. The key hurdle in the realization of this project is lack of modern warehouses and absence of collateral management companies.

It is necessary to remind the GoP that nearly 1000 palm oil plants were grown in Sindh near the coastal line. While a large percentage of plants have died due to improper management, extracting oil is almost impossible because no crushers have been installed. Achieving self sufficiency in edible oil can help in saving over US$2 billion currently being spent on import of palm oil.

Pakistan often faces ban on export of seafood because to not abiding by international laws. While local fishermen face starvation deep sea trawlers from other countries intrude into Pakistan’s territorial waters and take away huge catch. On top of all use of banned net results in killing of smaller fish that are ultimately used in the production of chickenfeed.  This practice going on for decades deprives Pakistan from earning huge foreign exchange besides ‘economic assassination’ of poor fishermen.

Pakistan’s agri and industrial production has remained low due to absence of policies encouraging greater value addition. Pakistan is among the top five largest cotton producing countries but its share in the global trade of textiles and clothing is around two percent.  The country needs to establish industries that can achieve higher value addition. Pakistan should export pulp rather than exporting fruits which have shorter shelf life.

Pakistan has overwhelming majority of Muslims but still goods worth billions of dollars are imported which are not Halal. Ideally, Pakistan should be exporting Halal food products to other Muslim countries. The country need to focus on breeding of animals (i.e. chicken, goat, cows) and export frozen meat and dairy products. If countries like Australia, and Holland can produce Halal Products what is stopping Pakistan.

Another example to follow is Bangladesh, which does not produces cotton but its export of textiles and clothing is more than that of Pakistan. This is because Bangladesh has focus on achieving higher value addition and Pakistan continues to produce law quality and low prices items. This is waste of precious resource and to be honest value addition is negative.

Pakistan has also not been able to benefit from being a member of SAARC. Some of the analysts say it is difficult to compete with India but has Pakistan really made any effort to achieve higher value addition? The reply is in negative due to prevailing mindset of Pakistanis who want to lead ‘easy life’.

Pakistan Stock Market: Impact of declining global oil prices

Oil futures have collapsed into bear markets as shale supplies boost U.S. output to the highest level in almost 30 years amid signs of weakening global demand. The biggest producers in the Organization of Petroleum Exporting Countries (OPEC) are responding by cutting prices, sparking speculation that they will compete for market share rather than reduce supply. It is up to OPEC to do something because the U.S. isn’t going to slow down production. Therefore, it may be of some interest to explore the impact of declining crude oil prices of Pakistan, which usually buys Arab light.

Arab light, which averaged at US$107.7/barrel last year, has now come down by 14% to US$92.3, similar trend was evident in Brent also down by 16%. This is primarily due to 1) supply boost coming in from countries that were previously facing some internal tensions and 2) diminishing demand from developed countries amid global economic slow-down. Amongst different countries, production boost coming from Iraq, especially post ISIS invasion as the militant outfit strives for self-sufficiency. If this was not enough, fading demand from developed countries such as China and Germany due to economic slow-down is further pushing the price of the commodity downhill.                    .

With OPEC countries scheduled to meet in November this year, the biggest question on everyone's mind is what will be the direction of oil prices in the future. It is believed that countries like Iran, Ecuador, Nigeria and Algeria amongst others with relatively higher respective break-even prices are of an opinion that OPEC countries should scale down their production to bring the prices up. Conversely, countries with relatively lower break-even price are likely to oppose this move.

Pakistan imported oil (crude + refined products) worth US$14.7 billion in FY14 when Arab Light averaged US$108/bbl. Keeping all other factors constant, this could lead to up to a US$1.5 billion reduction in the overall import bill which would be beneficial for the current account deficit (2MFY15 deficit: US$1.37 billion). Resultant comfort on the external account coupled with on-target foreign exchange mobilization through privatization transactions/sukuk issuance could convince the SBP to cut the discount rate which would be beneficial for leveraged plays such as ENGRO, EFOODS, EFERT, GATM and MLCF. At the same time, any Pak Rupee appreciation due to Balance of Payment strength would benefit importers such as Autos (HCAR, INDU & PSMC).

On the KSE-100 front, decline in International oil prices is likely to weaken E&P Sector’s FY15E earnings growth as 45% of the sector’s (ex-Mari) revenues are oil based. Analysts estimate every 5% decline in International oil prices is likely to dampen POL, OGDC and PPL projected FY15 earnings by 3.0%, 2.4% and 1.7%, respectively. Reduction in crude oil is likely to be negative for the OMC sector as it would lead to decline in product prices in the local market and will result in inventory losses also.

 

OGDC: Secondary Divestment of Shares by Government of Pakistan

The Government of Pakistan (GoP) intends to sell shares of Oil and Gas Development Company, (OGDC) through secondary offer.  It is sale of 10 percent or 322 million shares of its holding. The move will enhance OGDC’s free float from the present 15% to 22.5%. With the reported aim of raising US$800 million from the transaction, OGDC’s indicative offer price comes to PkR 248/share. While the final floor price is yet to be decided, a discount cannot be ruled out going by the size of the offer.  For details visit shkazmipk.com