Impact of low oil prices on Pakistan

In its latest meeting OPEC decided to maintain its oil output. This has triggered another slide in global crude oil prices. There are growing expectations that prices may remain low for longer than expected period.

One of Pakistan’s leading brokerages houses has analyzed possible implications of lower oil prices on the local stock market under three oil price assumptions of Arabian Light crude (WTI and Brent are less related to Pakistan as the country buys crude mainly from the Middle eastern countries. The brokerage house has based its analysis on three assumptions: 1) US$35/bbl, 2) US$40/bbl and 3) US$45/bbl) against its base case of US$50/bbl.

Remaining a key positive on the macro front, significant improvements are expected on 1) the BoP position on lower oil imports and 2) controlled inflation opening up room for continued monetary easing.

However, from the market's perspective this scenario will be a drag on index heavyweight Oil & Gas sector. Additionally, lower interest rates will continue weighing on banking sector's performance, however boding well for leveraged plays and high dividend plays.

Pakistan continues to benefit from lower oil prices, where another slide in the commodity's price holds positive implications for the country. Sensitivity analysis undertaken by the brokerage house indicates that with US$5/bbl reduction in CY16 will result in additional import bill savings of US$8 million/annum where oil averaging below US$45/bbl could comfortably lead to current account surplus for FY16.

Besides helping to sustain recent improvements in the BoP position, lower oil prices also have trickle down benefits on inflation, which can sustain at current levels (2.5%YoY average in CY15) across the medium term. With lower fuel costs and indirect impact on food, the sensitivity analysis indicates CY16 CPI average can hover in the range of 2.8% to 4.2%YoY.

A downwards trend in oil prices can effectively counter the low-base effect on CPI numbers, unlocking room for further monetary easing. While room could exist for a rate cut at US$45/bbl average. It is expected that the central bank may remain cautious with potential and discount rate may hover around at 5.5% at the lower extreme.

Pulled lower by falling global oil prices, Oil & Gas companies have experienced broad based selling (down 33%CYTD). E&Ps suffer from hampered profitability with POL being the most affected on account of high oil price partiality (53% of revenues in FY15). That said, the gas heavy (80%+ of overall production, 1,173mmcfd in FY14) OGDC continues to persevere in the E&P sector as its profitability is the least hurt by tumbling oil prices. Volatility in oil prices and its consequent impact on the interest rate cycle is likely to have negative implications for banking sector's profitability.

For the Big-6 banks, this is most likely to reduce CY16 earnings by 5%-18% assuming the worst case scenario. However, factors such as potential increase in the capital gains backlog and any uptick in private sector credit growth are expected to provide support to bottom-line should the interest rates come down further. In this backdrop, banks with a higher CASA ratio, greater concentration towards high margin consumer/SME segments, and higher PIB/investment ratio are expected to fare better than the rest. 

While Oil & Gas and Banks are likely to bear the brunt in case of lower oil prices and continued monetary easing, brokerage house sees cost side benefits trickling down to sectors with 1) high leverage sectors like Fertilizers, Cements and Telecom 2) higher fuel and energy costs sectors like Cements, Foods ,Shipping and Aviation.

Apart from these, Power sector is likely to benefit from reduced liquidity constraints amid lower cost of generation while a lower interest rate environment should keep the sector in limelight on account of attractive dividend yields.

Auction of Rs300 billion Ijara Sukuk to be held in last week of December

And finally State Bank of Pakistan (SBP) has announced auction of Government of Pakistan Ijara Sukuk (GIS-16) having Jinnah International Airport, Karachi as the underlying Asset.

Though, the size of auction was not announced the Government of Pakistan (GoP) is likely to mop up abut Rs 300 billion (around US$3 billion) through GIS-16.

There are twin objectives, top of the agenda being meeting the fiscal deficit and also facilitating Islamic financial institutions, particularly Islamic banks suffering from excessive liquidity problem.

GIS-16 will have a tenor of three years from the date of issue and Sukuk will be issued in multiple of one hundred thousand rupees. Profit on will be paid bi-annually on the basis of rental rate announced by the SBP prior to start of each half year.

Although SBP has not announced any auction date, the industry experts strongly believe that the auction will he held during last week of December 2015. Experts say the issue is already late by almost a month.

According to provisions of the notification of the GoP Ijara Sukuk Rules 2008 Islamic Banking Department of SBP will be responsible for monitoring of proper execution and the legal documentation.

Pakistan US$3 billion Ijara Sukuk auction delayed

The Government of Pakistan (GoP) was scheduled to issue Rs315 billion (equivalent to more than US$3 billion) Ijara Sukuk (GIS-16) by end November this year. The auction was to be held soon after over Rs212 billion Ijara Sukuk maturing on 21st November.
This has led to two serious issues: 1) the GoP still running short of money and 2) Islamic financial institutions sitting tons of non-yielding deposits. It is also feared that banks may also be failing in meeting statutory liquidity requirement (SLR).
It is believed that the underlined asset for the proposed GIS-16 issue was Jinnah International Terminal, Karachi.
One completely fails to understand promptness of Finance Minister in imposing additional taxes of Rs40 billion but completely ignoring GIS-16. If one can recall the Minister has been saying repeatedly that PML-N government was serious in promoting Islamic finance in the country.
The delay in auction is worth probing. The minister is requested to kindly find out what the debt management department is doing? 

Winners and losers of oil war

The US and Saudi Arabia will never accept that they are entwined in an apparent oil war. While Saudi Arabia keeps on producing oil at record level to maintain its share in the global markets, its earnings are plunging. Despite decline in price the shale oil production has not seen any significant reduction, although number of active rigs have declined to blow 600 from above 1,600.

On the face it appears that the US and Saudi Arabia are fighting ‘price war’, the perception is negated because both the countries connived to take the price above USS147/barrel. They are still supporting each other to punish Russia and Iran.

Oil from many countries is being pilfered by ISIS, which is being bought by those who claim to be fighting a war with the most brutal outfit, drawing strength from selling pilfered oil. In a way Kurds also don’t have the ownership of oil which they are exporting from Iraq.

Countries called P5+1 agreed with Iran to remove sanctions, but the restrictions still continue. Iran has borne the brunt most, because its oil related revenue has nearly halved and it is not yet clear when will it get the chance to boost oil exports.

Initially, Saudi Arabia was not willing to curtail daily production by OPEC members, but now it is talking about containing production provided Russia and other non-OPEC members also agree to curtail output.

With winter approaching fast, consumption of heating oil and gas is expected to rise but stockpiles are still hovering at record levels.

It may be true that all eyed are fixed on 4^th December meeting of oil cartel but little is expected to change. The three giants, the US, Saudi Arabia and Russia are not likely to change their stance.

The credible signs of improvement in the US economy are missing, Chinese economy is still faltering and IMF has already curtailed rate of global economic growth.

One point is clear that oil demand is not likely to grow significantly in the near future. Therefore, the only option available to oil producing countries is to curtail production. Many analysts are of the view that December 4 will come and go but the glut will continue.

Let no one forget that the biggest beneficiary of declining oil prices are OECD, are they ready to take a hit? The reply is a loud NO!

 

 

 

Who is godfathering ISIS?

The exponential growth of ISIS raises a key question, who is godfathering this most brutal group of killers?

The recent downing of a Russian plane by Turkey, a Nato member also made the talk louder that it is an indicator of proxy war between the US and Russia in Syria gaining further momentum.

It is also strongly believed that ISIS would have not become a phantom unless some of the countries not supplying funds, trained mercenaries and above all the most lethal arms.

The immediate reply has been provided by Russian Prime Minister Dmitry Medvedev, who said that the US actions in the Middle East helped ISIS becoming the monster.

He also said that ISIS attained the present size due to irresponsible US politics that focused on fighting Syrian President Bashar al-Assad instead of joining efforts to root out terrorism.

Lately, President Barack Obama said that Russia has to make a strategic choice as Assad can’t stay in power. This statement is a challenge to Russia who openly defies any and every attempt to depose Assad.

No one has a doubt that the US is godfathering ISIS; it has earlier godfathered al-Qaeda, which led to the armed assault against Afghanistan and Iraq. Ironically both the countries were not involved in 9/11 attacks in any manner what so ever.

Medvedev and Obama met in the Malaysian capital at the East Asia Summit that followed a week of talks and conferences in Asia dominated by the battle against terrorism. The UN unanimously endorsed a resolution calling the member countries to take all necessary measures to combat ISI in Syria and Iraq.

Obama said the US and its allies must go ahead with their battle against ISIS in Syria and Iraq with or without Russia’s cooperation.

Obama made two policy statements: 1) Russia has not officially committed to a transition of Assad moving out but they did agree to a political transition process and 2) we’ll find out over the next several weeks whether or not we can bring about that change in perspective with the Russians.

Medvedev has rightly said that global cooperation in fighting terrorism can only be successful if all actions are coordinated and sponsored by international institutions like the UN. He said this after a meeting with UN Secretary-General Ban Ki-Moon in Kuala Lumpur.

Ban urged Russia and the US to cooperate in fighting terrorism, adding he would unveil a plan early next year. However, Obama categorically said that the US and its allies will press ahead with their battle against ISIS with or without Russia’s cooperation.

The terrorist threat can only be fought jointly and arriving at few consensuses is a must. These are: 1) the US must accept its defeat in Syria, it has destroyed the country but could not overthrow Assad, 2) the US must also stop supplying funds and arms to the ISIS, 3) the US and its allies must also stop buying stolen oil from ISIS. If all these measures are not taken immediately than the world will e right in assuming that ISIS is ‘B’ team of CIA and pentagon.

 

 

Pakistan will not be a bed of roses for Hale

Pakistanis have always welcomed the US Ambassadors in Pakistan with the hope that relationship between the two countries will improve eventually. However, the experience has been contrary as the US mantra of ‘do more’ never ends. This often gives Pakistanis an impression that their country has become subservient to the sole surviving super power.
With the US focus shifting away from Arabian Peninsula to South China Sea, South Asia also seems to have lost its strategic importance. Fanning the differences between India and Pakistan, the two atomic powers of the region is playing with fire. The added problem is Afghanistan, where the governments failing in discharging their duties are prompt in blaming Pakistan.
The designate ambassador David Hale has spent some time in Tunisia, Bahrain, Saudi Arabia, and at the US Mission to the United Nations, with multiple tours in Lebanon and Jordan. In Washington, he has also worked as Deputy Assistant Secretary of State for Israel, Egypt and the Levant, Director for Israel and Palestinian Affairs, and Executive Assistant to Secretary of State Madeleine Albright.
Designate Ambassador replaces Richard Olson in Islamabad and will also have to work with him closely after his appointment as US Special Representative for Afghanistan and Pakistan. Olson assumes this responsibility at a time when the US and its Afghan allies face resurgent militancy in Afghanistan. Both the diplomats are expected to play a key role in the reconciliation process aimed at ending hostilities between the Afghan government and the Afghan Taliban.
One may recall that in the recent past Olson has talked about ending proxy wars. After the ISIS attack on France a question has become too loud, who supports this most brutal outfit? Naturally, fingers are being pointed at CIA and all those countries which are buying crude oil from ISIS. People also fail to understand why this phantom can’t be controlled if many of the super powers are busy in bombing ISIS hide out in Syria and Iraq.
It is also to remind the new Ambassador that in various regions CIA intervenes more in diplomatic issues. Olson’s predecessor Munter, who had been an advocate within the Obama administration for reconciliation with Pakistan, resigned in May 2012. People close to him have said he was frustrated that the CIA and Pentagon taking the lead on Pakistan policy.
Pakistan will not be a bed of roses for Hale as he has to face two of US historical rivals in Pakistan. Both China and Russia are making huge investments in Pakistan. Many Pakistanis have strong feeling that the US has never considered their country an economic partner but used their homeland and armed forces in a proxy war in Afghanistan.
I accept my inadequacy in understanding the US foreign policy but often I am forced to conclude that despite fighting a proxy war in Afghanistan, Pakistan had to hear ‘do more mantra’. Three of its immediate neighbors, India, Afghanistan and Iran are annoyed with Pakistan for towing the US foreign policy agenda blindly. Will the designate Ambassador be able to help Pakistan get its due place in the US foreign policy?

US troops to stay in Afghanistan perpetually

I wrote a blog as back as in August 2012 posing a question; will the US pull its troops out of Afghanistan after 2014? While the overwhelming perception was it will pull the troops out, my conclusion was contrary. This seems true as the US troops are still there, with 2015 approaching an end.

Even at that time I had stated very clearly that the US attack was not to liberate Afghanistan from the control of USSR or Taliban but to occupy it for economical and political reasons. Neither presence of Taliban in Afghanistan not its involvement in attack on the world trade center was known to all.

Now, I can attribute occupation of Afghanistan to: 1) valuable metals in the country, 2) geopolitics and top of all 3) the huge quantity of poppy produced in the country. Being the super power the US keeps its troops in almost every region where it has some stake. Afghanistan has an important place in the US foreign policy due to common borders with Pakistan, Iran, China and proximity with many oil and gas rich Central Asian countries.

After the Islamic Revolution, Iran was projected as the biggest threat for the world, especially for Arab monarchs and also to the US and its 53^rd state, Israel. The US also had plans to send its troops to Iran to takeover country’s nuclear assets. It needs an outpost near Iran and Afghanistan is the ideal country.  The two countries share a long mountainous border, which is virtually impossible to monitor and defend.  

China is the second most powerful superpower, which is likely to surpass the gross domestic product of the US by 2020 and become world’s strongest economic superpower. The US already has outposts in Taiwan and South Korea and Afghanistan provides the third base in case any attack o China becomes the ultimate.

Taking Afghanistan as hostage was part of the US foreign policy and military strategy. The USSR believed that getting control over Afghanistan could give it a perfect foot hold in South Asia and the Middle East. The US also believes the Afghanistan is the gateway to central Asian countries.

Over the years China remained focused on its economy. When Russia tried to stretch its muscles sanctions were imposed on it. Now it is attacking ISIS bases in Syria and also trying to establish friendly relations with Pakistan and other strategically important countries

This does not bode well for the US, still adamant at maintaining its hegemony in South Asia and MENA. Therefore, probability of end to the US occupation of Afghanistan is hoping against the hopes.