Pakistan Stock Exchange index up 3.20%WoW

The week ended on August o4, 2023 started on a very optimistic note, with the market up 958 points on Monday and closing at 48,035 points by day end. This was mainly driven by the central bank decision to keep policy rate unchanged at 22% despite the market expectations of an increase.

Moreover, positive sentiments encircling Finance Ministry’s expectations of eased out inflation during July and to stay within 25-27% further contributed to market being optimistic on Monday. On the contrary, CPI figures announced on Tuesday materialized to 28.3%YoY and negated the original statement made by the Finance Ministry.

Trade deficit decreased to US$1,607 million in July 2023 from US$1,863 million in June 2023.

The index remained on upward trajectory on Wednesday to close at 48,765 points and then cascaded again to 48,611 points after staying volatile on Thursday.

Overall, the benchmark index ended gaining 1,509 points or 3.20%WoW during the week and closed at 48,586 points while transcending to 48,765 points on Thursday.

The market capitalization this week was PKR7.290 trillion increasing from PKR7.097 trillion a week ago.

Average daily turnover spiked to 391.82 million shares from 125.64 million shares a week ago, reflecting a sharp increase in market participation by 211.9%.

Foreign exchange reserves held by SBP decreased to US$8.154 billion from US$8.186 billion to and the total liquid reserves declined US$13.464 million from US$13.534 million as of July 27, 2023.

Other notable news for the week Were: 1) Prime Minister Shahbaz Sharif announced the dissolution of the National Assembly to take place on 9th August, 2) July textile exports declined 15%YoY to US$1.31 billion, 3) Pakistan Stock Exchange (PSX) got ready  for Symmetry Group’s IPO, 4) Chinese Exim bank rolled over US$2.4 billion which are due in next 2 fiscal years, 5) July cement dispatches rise 57.44%YoY to 3.212 million tons, and 6) Senate passed a bill allowing the establishment of state-owned Pakistan Sovereign Wealth Fund.

Modarabas/ Sugar and Allied Industries/ Chemical have been worst performers, whilst Close-Ended Mutual Fund remained an anomaly.

Top performing scrips of the week were: HGFA, CNERGY, OGDC, POML, and THALL, while top laggards included: COLG, UBL, FABL, YOUW, and CEPB.

Flow-wise, major net selling was recorded by Mutual Funds with a net sell of US$5.97 million. Companies absorbed all of the selling with a net buy of US$8.82 million.

The market is likely to stay positive given the strengthening of macros and the receipt of Chinese loan rollovers worth US$2.4 billion. Market participants are advised to follow a cautious approach when investing while focusing on dollar denominated revenue stream companies like E&Ps and Technology to hedge against currency risk or in companies with healthy dividend yields.

Bleak outlook for food grain shipment from Ukraine

Russia’s exit from the Black Sea grain export deal last month dampened outlook to keep Ukrainian supplies flowing.  

The issue at present is global access to food and affordability at a time when inflation shows few signs of letting up. 

Food supply risks are multiplying again, with extreme weather and India’s rice export restrictions adding to the concerns.

According to data released Friday, the United Nations’ global food index rose for the first time in three months in July. The rice index reached its highest nominal level since 2011.

Ukraine has redirected some crop exports by rail, road and river through its European neighbors, but those volumes are causing tensions.

Poland, Slovakia and Hungary, along with Bulgaria and Romania, have banned purchases of Ukrainian grain after declining prices spurred protests from local farmers.

A key route to ship Ukrainian grain is the Danube, though that’s expensive and lacks capacity. The Kremlin has also escalated assaults on grain infrastructure in Ukraine, including attacking Danube ports. It also fired missiles that damaged equipment at a cargo terminal in the Odesa region.

The options for farmers who made Ukraine a global breadbasket are narrowing as the economics of their business deteriorates. They have limited storage space as this year’s harvest piles up. Major farm companies are curbing winter crop plantings.

Decisions taken over the next few weeks in Ukraine — for wheat, barley and rapeseed — will have repercussions for the 2024 harvest. That will hit both Kyiv’s precious wartime revenues, and global supplies of key food staples.

Meanwhile, more than 90 countries joined the US in signing a joint communiqué condemning the weaponization of food, according to US Secretary of State Antony Blinken. Leading a UN debate on efforts to combat global hunger, he zeroed in on Russia for disrupting the flow of food with its war on Ukraine and the grain deal exit.

Another sign of Russia using food as a political tool is that it may offer cheaper grain exports to countries that have not imposed sanctions. The government could get the power to lower duties on commodities exports including grain and fertilizers to “friendly” countries, Prime Minister Mikhail Mishustin said this week. 

Diplomatic efforts are still underway to persuade Russia to return to talks on the export deal from countries including South Africa, which has adopted a non-aligned stance toward the war.  

Iranian foreign minister on two day visit to Pakistan

Pakistan and Iran agree on a five-year plan on Thursday to achieve US$5 billion bilateral trade. The two countries in late 2021 decided to take measures to expand annual bilateral trade to US$5 billion by 2023.

The new plan has been devised while Iran Foreign Minister Hossein Amir Abdollahian is on a two-day visit to Pakistan; he reached Islamabad on Wednesday on the invitation of Pakistani at foreign minister Bilawal Bhutto-Zardari.

Addressing a press conference alongside him in Islamabad on Thursday, Bilawal said the five-year trade cooperation plan was aimed at removing impediments in bilateral trade, finalizing a free trade agreement and establishing institutional linkages between the private sectors of both countries.

“I am confident that the steps we are taking today will chart the course for a long-term durable economic partnership between our two countries in the months and years ahead,” he said.

Abdollahian said both countries were committed to increasing the bilateral trade to US$5 billion and had agreed to set up a special economic free trade region along the common border points.

A press conference was held after the two foreign ministers led delegation-level talks at the Foreign Office in Islamabad earlier today.

Bilawal told the media that the two sides had agreed to priorities the operationalization of the five remaining border markets by the end of year 2023.

The foreign minister said both sides had also agreed to continue their active engagement on Afghanistan with the view to advance peace and stability there and promote the wellbeing and prosperity of Afghan

Speaking after him, Abdollahian emphasized the need for enhanced bilateral cooperation in the fields of economy, trade and tourism.

The Iranian foreign minister also emphasized the completion of the Pakistan-Iran gas pipeline, saying that the project would definitely serve the national interests of the two countries.

He called for supporting the people of Afghanistan, highlighting that any situation in Afghanistan would have an impact in the neighboring countries, Pakistan and Iran.

Later, the two foreign ministers saw the signing of memoranda of understanding between Pakistan and Iran in various fields.

Abdollahian’s arrival was preceded by the arrival of a high-ranking delegation, including Iran’s deputy foreign minister for economic affairs and senior officials from the Ministries of Trade, Roads and Urban Development, Investment, Agriculture and Energy for preparatory meetings.

Policymakers caught off guard by Fitch downgrade of US credit rating

The move by market agency Fitch Ratings to downgrade the US debt rating has startled lawmakers and policymakers alike, who said they were perplexed by the move amid strong recent economic indicators.

The US political instability reflected in the January 06, 2021, insurrection at the Capitol was a factor in the downgrading has further confused the Beltway, which was already reeling from a third indictment of former President Trump.

Fitch downgraded its issuer default rating for the US on Tuesday evening, surprising investors, roiling equity markets and sending bond yields higher Wednesday morning. 

Treasury Secretary Janet Yellen was also vocal about the move by Fitch Ratings, slamming it on Wednesday as flawed and entirely unwarranted.

“Fitch’s decision is puzzling in light of the economic strength we see in the United States,” Yellen said in prepared remarks.

“The US remains the world’s largest, most dynamic, and most innovative economy — with the strongest financial system in the world.”

The agency cited the erosion of governance and fiscal deterioration over the next three years as reasons for the downgrade, also mentioning the debt ceiling default that nearly crashed the US and global economy in June.

“You have the debt ceiling; you have January 06, 2021. Clearly, if you look at polarization with both parties … the Democrats have gone further left and Republicans further right, so the middle is kind of falling apart basically,” Richard Francis, a senior director at Fitch, told Reuters.

The downgrade is being met with criticism from both parties, who don’t seem to be shying away from pointed partisan rhetoric despite the assessment of increasing polarization.

“We strongly disagree with this decision. The ratings model used by Fitch declined under President Trump and then improved under President Biden,” White House press secretary Karine Jean-Pierre said in a Tuesday statement.

“It’s clear that extremism by Republican officials — from cheerleading default, to undermining governance and democracy, to seeking to extend deficit-busting tax giveaways for the wealthy and corporations — is a continued threat to our economy,” she said.

“The United States faces serious long-run fiscal challenges. But the decision of a credit rating agency today, as the economy looks stronger than expected, to downgrade the United States is bizarre and inept,” posted former Treasury Secretary Larry Summers on X, the platform formerly known as Twitter.

Blaine Luetkemeyer said in a Wednesday statement he had concerns about Fitch’s history of subjective ratings but also went after Democrats’ spending that he called reckless.

“Reckless fiscal policy that caused the inflation we’re still suffering is also harming confidence in our currency and treasuries. House Republicans understood this truth which is the reason Speaker -Kevin McCarthy - made countless attempts to start a dialogue with the White House months before the debt limit was reached,” Luetkemeyer said.

Other GOP members said that Biden’s recent legislative decisions were the key in pushing Fitch into deciding the government could not work together.

“When Fitch specifically cited the problem of ‘last-minute’ resolutions, they may as well have noted Biden’s refusal to negotiate with Republicans for months, while insisting on even more wasteful spending,” House Ways and Means Committee Chairman Jason Smith said on Fox News on Tuesday.

“President Biden’s brinksmanship — not to mention the US$10 trillion in new spending he and Washington Democrats passed over the past two years — pushed America’s credit rating off the ledge,” Smith said.

“Now families and small businesses already dealing with soaring interest rates and lost wages from Biden’s inflation crisis will also have to face the consequences of a reduced confidence in America’s sovereign debt.”

Yellen reiterated that the new Fitch rating does not change what all of us already know: that Treasury securities remain the world’s preeminent safe and liquid asset, and that the American economy is fundamentally strong.

The White House may be working on a proposal following the creation by Biden of a working group in July to look at ways to minimize debt ceiling brinkmanship.

“President Biden should be commended for making reform of our broken debt limit process a priority,” Shai Akabas, executive director of economic policy with the Bipartisan Policy Center, a Washington think tank, said in a statement last month. 

“We urge him to work with congressional leaders from both parties on reform that will avoid the kind of brinkmanship we experienced earlier this year,” he wrote.

 

Saudi Arabia participates in Pakistan Minerals Summit

Vice Minister of Industry and Mineral Resources for Mining Affairs Eng. Khalid Saleh Al-Mudaifer has confirmed that mineral resources played a crucial role in augmenting the industrial sector, creating job opportunities and achieving economic growth.

Al-Mudaifer made these remarks while participating in Pakistan Minerals Summit, which was held in the Pakistani capital Islamabad. He noted that the mining industry has been the driving force behind the economic development of many countries around the world.

The mining industry offers promising opportunities, and therefore everyone must seize these opportunities by formulating new regulatory standards and adopting world-class environmental, social and institutional governance practices, in addition to the use of the latest technologies and investing in the infrastructure and human resources, he said.

"This is what we are aspiring for today through our presence in Pakistan to cooperate with our partners in the industry and mineral resources system and in the private sector," Al-Mudaifer said.

He stressed that Saudi Arabia and Pakistan are connected with strong relations, and share historical and cultural ties and successes. "We are working together to expand our relations in the fields of trade and investment," the vice minister said.

Al-Mudaifer noted that the mineral-rich region, which extends from Africa to West and Central Asia, including Pakistan, has enormous potential, and this would change the rules in developing flexible and responsible mineral value chains, as well as providing the minerals that the world desperately needs, especially with the high and growing global demand for essential minerals required in clean energy technologies.

It is expected that the industrial transformation projects and initiatives will be doubled to meet the local demand for minerals, he said, adding that this contributed to their use of the best and safest technologies in the world to conduct more surveys and exploration to discover new mineral deposits.

Saudi Arabia has worked in the past to fully develop the mining sector. It launched the world's largest and most recent regional geological survey on an area of ​​600,000 square kilometers from the Arabian Shield region spending more than US$1.5 billion, in addition to developing the national database for earth sciences, which contains 80 years of Saudi geological records.

The Kingdom has also issued a Mining Investment Law, which is distinguished for its transparency, clarity and the principles of environmental, social and institutional governance.

Iran-Saudi détente beginning of new era

Alireza Enayati, who has been confirmed as the new Iranian ambassador to Riyadh, told reporters on Monday that the reconciliation deal between Iran and Saudi Arabia will benefit all countries in the region.

When asked about who would benefit most from the deal, Enayati said, “The benefits of Iran-Saudi rapprochement are not polarized”. 

Both countries showed equal willingness to restore ties, he pointed out. 

He added no country can guarantee its own security if it decides to disregard its neighbors. 

The diplomat also hoped for a new order in the Persian Gulf where regional nations can take control and establish security without receiving assistance from any external power. 

Enayati said Iran and Saudi Arabia first sat down at the negotiating table two years ago in Baghdad, Iraq. Five rounds of talks followed the first one is the Omani capital Muscat with the presence of Iraqi mediators, he stated. 

The two countries were finally able to reach a deal in China, he added. 

Both countries are willing to start a new chapter in their ties and are planning to cooperate in various fields, including economy, military, culture and technology. 

The envoy added his country is also looking to strengthen ties with other Arab states. “Iran is looking to expand ties with other regional countries. It has already made constructive moves in case of Kuwait and the Emirates.” 

When asked about the main destabilizing actor in the region, Enayati pointed the finger at Israel. “The only seditious force in the region is Israel.” 

He warned that the Israeli regime is trying to grow its footprint in the Persian Gulf and urged countries to be weary of the regime’s destructive acts.

Iran and Saudi Arabia announced a détente in March 2023 after seven years of frozen ties. Iran’s embassy opened in Riyadh in May. Saudi Arabia has yet to open its embassy in Tehran. 

 

 

Buying Russian crude unviable for Pakistan

In one of my blogs I had questioned the economic viability of Pakistan importing Russian crude oil on three points: 1) longer distance, 2) higher freight and handling charges, 3) Pakistani refineries not tuned to refine Russian crude and on top of all 4) why to buy Russian oil on upfront payment when Saudi Arabia is supplying crude on deferred payment. Today, a Reuters report substantiated my apprehensions.

The report says, “Pakistan is unlikely to meet a target for Russian crude to make up two-thirds of its oil imports, despite attractive prices, hampered by a shortage of foreign currency and limitations at its refineries and ports”.

It also pointed, “The benefits are being offset by increased shipping costs and lower quality of refined products compared to the fuels produced from crude from Pakistan's main suppliers, Saudi Arabia and the United Arab Emirates”.

It goes to the extent of saying, “Added to the challenges, transportation costs for Russian crude are higher than for Middle Eastern crudes not only because of the longer distance traveled, but because Pakistan's ports cannot handle the large vessels departing Russia”.

According to the report, “Urals crude had to be transferred from a supertanker on to smaller ships, known as a lightering operation, in Oman before heading to Pakistan, unlike direct shipments from the Middle East”.

Even with that extra cost, it was worth importing Russian oil, said Viktor Katona, lead crude analyst at Kpler, as Saudi Arab Light crude is US$10 to US$11 per barrel more expensive for Pakistani refiners than Urals, while lightering operations add around US$2 to US$3 per barrel.

"Pakistani buyers would still be much better off," he said.

The key issue is, “Urals quality is a deterrent, as Pakistan's refineries cannot get as much gasoline and diesel out of Urals crude as they produce from Saudi and UAE crudes”.

It will take Pakistan Refinery (PRL) at least two months to fully process its first cargo of 100,000 tons (730,000 barrels) of Urals crude as it needs to be blended with Middle East crude to offset the high output of fuel oil from the Russian oil, Zahid Mir, chief executive of the refinery.

"Our optimum processing solution is to blend Urals with Middle Eastern imported crude while not exceeding 50% Ural in the blend," Mir said.

The residual fuel produced from Urals crude has to be mixed with diesel and kerosene to meet specifications for local use while the remainder is exported, but the deal was still commercially viable for Pakistan, Mir said.

PRL has no plans to upgrade its refinery to process fuel oil into higher quality fuels, he added.

Kpler's Katona expects Pakistan's liquidity issues and technical challenges to weigh on its appetite for Russian crude.

"Russian imports into Pakistan will not grow into anything bigger than one cargo per month," he said.