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

State Bank of Pakistan Keeps Policy Rate Unchanged

The State Bank of Pakistan (SBP) has decided to keep the policy rate unchanged at 10.0 percent. The decision was taken by the Central Board of Directors of SBP at its meeting held under the chairmanship of Governor Ashraf Mahmood Wathra in Karachi Saturday. Policy vigilance requires balancing the tradeoffs between ensuring the continuation of macroeconomic stability, especially in the external sector, and assuaging the fallout of potential damages due to floods. Therefore, the Board of Directors of SBP has decided to keep the policy rate unchanged.

The post July monetary policy decision period continued to witness stable macroeconomic conditions. This was most visible in the headline variable of inflation that declined to 7.0 percent YoY in August 2014, the lowest level since June 2013. Moreover, after recording an improved 4.1 percent growth rate in FY14, real economic activity is expected to continue in FY15. The other highlight of this stability is the gains on fiscal liberalization, shrinking budget deficits, contained government borrowings and improved debt profile.

Following on the actual number of 8.6 percent in FY14, the average CPI inflation during Jul-Aug 2014 was recorded at 7.4 percent. This declining trend is broad based since both measures of core inflation, Non-Food Non-Energy (NFNE) and trimmed mean, also decelerated YoY to 7.8 percent and 7.14 percent in August 2014 as compared to 8.7 percent and 7.9 percent in June 2014, respectively. Although, actual low inflation might weigh positively on market sentiments, it is the future path of inflation that matters for monetary policy decision. The current outlook of around 8 percent average CPI inflation for FY15 might change adversely if the subsidy to electricity is cut and Gas Infrastructure Development Cess is levied.

After demonstrating low growth since 2008, real economic activity started to show signs of revival in FY14. Continuation of the current growth momentum, however, primarily hinges on agriculture productions in FY15. This is because Large Scale Manufacturing (LSM) growth might remain constrained due to continued energy shortages; reduced production capacity of independent power plants; low supply of gas to fertilizer plants; lower domestic and international prices in the sugar sector; and higher inventories and slower exports growth prospects in food and textile sectors, respectively.

Incorporating the latest trends in exports and imports, oil payments in particular, trade deficit is going to dominate the composition of external current account deficit, even with a healthy growth in workers’ remittances. Declining private capital inflows, foreign direct investments in particular, would present continued challenges in managing the balance-of-payments position. In this regard, realization of expected privatization receipts and issuance of dollar-denominated Eurobond/Sukuks would be important.

In addition to the risks identified above, ongoing political impasse, delay in the finalization of fourth IMF review, and the current heavy rains and floods, which have engulfed central and southern Punjab, threaten the nascent recovery in economic activity. The former two would weigh more on the private capital inflows. The latter can potentially disrupt the output and supply chain of the perishable food items, which challenges an otherwise benign inflationary outlook. While it is going to take some time before the full extent of damages arrive, initial opinions and past experiences suggest that the current floods would damage some khariff crops and may disrupt supply chain temporarily. Besides having implications for economic growth, floods can also create macroeconomic imbalances by putting pressures on fiscal and external sector. Moreover, supply of loanable funds in the credit to private sector market may also be adversely affected, at least initially. Reflecting these apprehensions indeed, there is deterioration in SBP-IBA’s Consumer Confidence Survey of September 2014 as well. 

Pakistan: Initial Public Offering by Engro Powergen

Scheduled to become the latest addition to Pakistan’s listed power companies, Engro Powergen Qadirpur Limited (EPQL) will be formally listed on October 27, 2014 after an initial public offering (IPO) of 40.475 million shares (12.5% of total paid up capital) at PkR30.02/share. The unique hallmark of the 225MW plant (net 217.3MW) includes utilization of flare gas from Qadirpur gas field, which insulates it from gas shortages being faced by other independent power plants (IPPs).

This allows EPQL to more fully benefit from the cost efficiency of a combined cycle plant. EPQL posted profit after tax of PkR1.09 billion (EPS: PKR3.36) for 1HCY14, up by 4%YoY. At the same time, interim 1HCY14 dividend stood at PkR1.54/share. On an annualized basis, this translates into an attractive P/E of 6.72 and offering dividend yield of 10% which compared well against a forward P/E of 9.85 for LPL and D/Y of 12% and 12.8% for HUBC and KAPCO, respectively.         . 

EPQL was set up under the 2002 Power Policy and operates a 225MW combined cycle, gas and HSD fired power plant in Qadirpur, Sindh. The Company has a 25-year power purchase agreement (PPA) with NTDC commencing from Mar 27'10 (COD), and a Fuel Supply Agreement (FSA) with SNGP/OGDC for running the plant on unsweetened flare gas (75mmcfd) from the second largest gas field of Pakistan. This is underpinned by an average load factor of 85% over 2011-13, which improved to 95% in 1QCY14 following turbine repairs in 4QCY13.  

EPQL posted NPAT of PkR1.09 billion (EPS: PkR3.36) for 1HCY14, up by 4%YoY (increase in other income by PkR148 million YoY). It paid interim dividend of PkR1.54/share for 1HCY14 stood at adding PkR552 million to unappropriated profit).

For CY13, EPQL posted net profit of PkR1.01 billion (EPS: PkR4.5), lower by 31%YoY due to a rotor blade fault that shut the plant down for 95 days. That said, the full-year CY13 dividend was PkR6.17/share, following the circular debt repayment last year.    

A total of 80.95 million shares are being offered (inclusive of 40.47 million shares under pre-IPO placement through institutional investors). Priced at PkR30.02/share, this issue will help in raising an amount of PkR2.43 billion. The purpose of the issue is ostensibly to pay-off liabilities incurred by EPL for project financing and finance new projects including the LNG terminal being constructed by ENGRO subsidiary, Elengy Terminal Pakistan Ltd. 

Compared to Lalpir Power Ltd (LPL), a recently listed IPP of similar capacity, EPQL's implied valuation multiples at PkR30.02/share. Furthermore, EPQL stacks up well on payouts as well with a CY14E dividend yield of 10% as compared to a forward dividend yield of 12% for HUBC and 12.8% for KAPCO. In this regard, HUBC and KAPCO trade at a forward P/E of 10 and 7.35, respectively. A consistent payout ratio of 50% (ex-CY13 payout of 137% due to circular debt payment) and a consistent 31% average ROE over 2011-13 would encourage investors to buy its shares

National Bank of Pakistan posts 28 per increase in net profit



On Tuesday the Board of Directors of National Bank of Pakistan (NBP) approved financial results of the Bank for the six months period ended June 30, 2014, posting 42 percent increase in net earnings.

On a consolidated basis, NBP has posted profit after tax of PkR7.67 billion (EPS: PkR3.60) for 1HCY14 against restated net profit of PkR6.01 billion (EPS: PkR2.83) for 1HCY13, translating into 28%YoY growth.

Had last year’s accounts not been restated (changes to share of associates’ profit and admin expenses), growth would have tapered to 11%YoY. The result was above expectations with the deviation due to higher than expected Net Interest Income (NII) and exceptionally high capital gains.

Key 1HCY14 result highlights include: 1) a 2%YoY reduction in NII, 2) a 66%YoY reduction in total provisions, 3) a 13%YoY non-interest income growth largely due to capital gains and 4) a 12%YoY increase in non-interest expenses.

For 2QCY14 alone, NBP posted net profit of PkR4.44 billion (EPS: PkR2.09), up 79%YoY/38%QoQ making this the best quarter since 1QCY12. Capital gains for the quarter rose to PkR3.83 billion, one of the highest on record which together with a sequential spike in NII, enabled total income to register at record high levels. Despite the high capital gains, deferred tax pushed the overall tax rate for 2QCY14 to 39.3%.

The Bank is strongly capitalized with capital and reserves of PKR 160 billion, which translates into break- up value per share of over PKR 75 per share. The bank’s rating was re-affirmed at “AAA” by JCR VIS Credit Rating Agency in June 2014.

At current levels, the target price of PkR65/share implies an accumulate stance. That said, investors must revisit detailed accounts where asset quality position would be critical.

Pakistan: POL earnings up by 19 percent

Pakistan Oilfields Limited (POL) announced its FY14 result posting profit after tax of PKR12.9 billion (EPS: PKR54.5), a growth of 19%YoY. The result was below market expectations due to higher than estimated amortization charges, primarily due to Manzalai reserve downgrade write-off. The result announcement was also accompanied by a final cash dividend of PKR32.5/share taking full year payout to PKR52.5/share. The notable surge in earnings during FY14 can be attributed to a 23% increase in the topline to Rs35.5 billion on account of 1) a 25%YoY increase in oil production to 6,000bpd and 2) a 6.3%YoY depreciation in average Pak Rupee value against the US Dollar. Analysts maintain BUY stance on POL with a target price of PKR655/share, offering a total return of 29%.

Attock Petroleum posts full year results, EPS up 11 percent

Attock Petroleum Limited (APL) posted profit after tax of PKR4.3 billion (EPS: PKR52.2) for FY14 (financial year ended June 30, 2014) as compared to PKR3.9 billion (EPS: PKR47.1) for the corresponding period last year, depicting a growth of 11 percent YoY.
The result was below expectations due to higher than estimated inventory losses in 4QFY14.
The increase in earnings can be attributed to a) 18% higher volumetric sales of major petroleum products, b) increased margins on HSD and motor gasoline and c) lower late payment charges.
The announcement was also accompanied by final dividend of PKR30/share, taking full year FY14 payout to PKR47.5/share.
At current levels, analysts maintain ‘accumulate’ stance on APL with a trade price of PKR625/share, offering a total return of 15 percent.

OGDC discovers gas near Karachi

Oil and Gas Development Company (OGDC) has discovered hydrocarbon reserves in exploratory well Pasakhi deep well-4 in Hyderabad district, some 200 kilometers from mega city Karachi. The oil and gas giant has 100 per cent working interest in Pasakhi lease.

“The structure of Pasakhi deep well-4 was delineated, drilled and tested using OGDC’s in-house expertise. The well was drilled down to the depth of 3,460 meters, targeting to test the hydrocarbon potential of massive sands of lower Goru formation where the Company hit on the hydrocarbon reserves.

According to the information made public by OGDC the zone had been tested with 14.015 mmscfd of gas and 125bpd of condensate at 36/64inch choke size.

“This discovery of hydrocarbon in Pasakhi deep well No 4 will add to the total hydrocarbon reserves base of OGDC.

Analyst Mohammad Affan Ismail at a local brokerage house, BMA Capital commented that the discovery, which stands at 14.02mmcfd of gas and 125bpd of oil would slightly impact the Company’s annualised earnings.

According to Pakistan Petroleum Information Service (PPIS), the E&P giant ‑ OGDC ‑ is further pursuing exploratory drilling of seven more wells (four wells were near completion) mainly in gas rich Sindh and Balochistan regions.

Pakistan Stock Market Rocked by Politics

One of the leading brokerage houses of Pakistan, AKD Securities has once again reiterated that country’s equities market is still under pressure due to volatile political situation.

On Monday the benchmark KSE-100 Index lost more than 1,300 points or 5 percent during first half of the day. Nearly 100 stocks (18 percent of total companies listed at Karachi Stock Exchange) hit their lower circuits. The Index has shed about 8 percent from its CYTD high.

The most recent decline is due to further increase in political noise over the weekend, with the PAT announcing its own long march on Independence Day (August 14) and the Army calling a corps commanders' meeting on Monday.

In the absence of a resolution, these developments could continue to drag the market lower in the immediate-term where the market's regional discount (40 percent at present) is likely to expand.

The brokerage house continue to advocate a cautious stance in the immediate-term but flag that Pakistan Equities are beginning to look very attractive from a bottom-up vantage as company level fundamentals remain intact.

Now there is a big question, will political noise rise further? While the market shed 3.1% last week, strong buying was witnessed throughout the week from foreign institutions, with net FPI inflow of US$21.6 million increasing CYTD inflow to US$359.6 million.

In addition, local participation was also witnessed at the tail end of the week with news flow pointing towards a potential breakthrough in the political impasse through talks.

However, the weekend added to the quagmire with PTI remaining firm about long march plan and fresh clashes taking place between the police and PAT activists, leading to the PAT announcing its own long march in the capital on the same day.

Within this backdrop, the Pakistan Army has also called in a corps commanders' meeting to discuss the ongoing Operation Zarb-e-Azb as well as the domestic political situation. While a military takeover still appears unlikely, it cannot be ruled out completely, particularly if street protests turn violent.

The Pakistan market has seen its fair share of political crises over the last 10 years; prominent ones being PPP Chairperson Benazir Bhutto's assassination and resignation of President Musharraf.

In such scenarios the market has at an average shed 5 percent during political crises with the highest fall of 16.3 percent in the week after President Musharraf's resignation and before the imposition of the price floor.

To date the KSE-100 Index has shed 8 percent from its CYTD high. Extending this analysis to the 1990s shows a similar picture (average market decline of 5 percent), with the greatest loss in market cap of over 10 percent following President Musharraf's coup. Based on Monday's intraday low, the KSE-100 Index trades at a forward P/E of 7.9x which is at a 40% discount to the MSCI Asia Pacific (excluding Japan Index).

Although the economic indicators are showing a positive trend but political uncertainty is negatively impacting the market. Analysts recommend investors to follow 'wait and see strategy' policy till stabilization of the political situation. Local equities are now trading at a discount. Although, numbers like these have not been seen for quite some time in recent past. In fact, there are many stocks which have the potential to provide above-average return going forward.

 

 

 

 

From Colonialism to Corporate Imperialism

At the age of 61 and having written over 2.5 words, this morning I sat down to review my work. Just the other day in one of my blogs I termed Abu Bakr Al-Baghdadi, the new Lawrence of Arabia. I spent a few hours in searching what the world is saying about him, his vision and mission and modus operandi. This search further consolidated my perception. Therefore I sat down to pen what I have witnessed over the years, especially during the last four decades.

I joined Institute of Business Administration (IBA) Karachi in 1973. This is the premier Business School established in Pakistan with the financial assistance and curriculum guidelines provided by one of the leading Business Schools of United States. My first employment was with a corporate having majority stake from United States also. My second job was with a group that was one of the top 25 richest families as described by the then Prime Minister Zufikar Ali Bhutto. Subsequently, I set up my own business but faced virtual bankruptcy due to the worst linguistic riots in Karachi during 1986-92. During this turmoil period I started contributing articles in local media as economic analyst.  Since then I have graduated from economic/financial analyst to commentator on political economy and geopolitics. During this quarter of a century, the key sectors in focus have been textiles and clothing, energy, commercial banks, fertilizer and country’s economy, its relationship with multilateral lenders, global mergers and acquisitions and their impact on local corporate sector. Another key area of interest has been ongoing privatization in the country that began in early nineties.

In my life I have witnessed three wars between Pakistan and India and conversion of eastern part of the country into Bangladesh. In Middle East expansion of Israel through occupation of parts of Arab countries and Arabs realizing power of crude oil. Islamic revolution in Iran and since then the country faced economic sanctions. Iraq’s attack on Iran and a decade long war financed by Kuwait and Saudi Arabia. Iraq’s attack on Kuwait, 9/11 incidenent, US attack on Iraq and Afghanistan, toppling of regimes in Iraq and Libya and proliferation of Islamic militant groups. If Taliban were accused for buying arms from drug money ISIL is also alleged for acquiring arms in exchange for stolen oil from Iraqi fields and selling it in the global markets.

As regards the corporate sector, there has been a shift in paradigm, slogan changing to optimizing profit from maximizing profit. Mergers and acquisitions are creating ever stronger conglomerates classified under Fortune-500 and Fortune-50 companies. It is often alleged that these companies own 90 percent of global wealth directly or indirectly. These entities are also alleged for playing a major role in installing and toppling of governments in least developed and even developing countries.

People living in South Asia, particularly areas now comprising, India, Pakistan and Bangladesh are familiar with East India Company becoming a monster, end of more than 700 years rule of Mughals, 1957 massacre of Muslims and Indian subcontinent becoming part of British Raj. It may also be kept in mind that Britain was not alone; other countries establishing their colonies included France, Portugal and Holland. The two World Wars were also for attaining supremacy and the alliance of big powers created UNO, to protect their vested interest by retaining the veto power with them. They also created World Bank and IMF to control economic policies of the developing countries and keep them perennially dependent on them.

Developed world after having achieved food security also started working on achieving control on energy products. This point had become obvious in mid sixties after a war in the Middle East that only those countries will enjoy power that have control on fossil oil and gas reserves. Multinational exploration and production companies now have virtual control on these reserves, not the countries where these reserves are located. Crude oil prices are driven by hedge funds and not demand and supply. The worst victims of ‘ongoing energy war’ are Iraq, Iran, Libya and Nigeria. If economic sanctions were imposed on Iran to curb its oil export, Libyan and stolen Iraqi oil is being sold in the global markets by groups enjoying support of Zionists.

Ironically Muslim countries are the worst victim of ‘divide and rule’ legacy of colonial era. They have been divided into sects and sub-sects. Though, there is interfaith harmony to a large extent, Western media, under the control of Zionists, is constantly talking about Shia-Sunni war. The simultaneous emergence of ISIL and Israeli attack on Gaza are part of the grand agenda to render Muslims powerless, through financial assassination. Muslims don’t need leaders propagating killing but reformist talking about interfaith harmony. They must learn to distinguish between friend and foe or get ready for their elimination because only the hypocrite will perpetuate.

                                                                               

Chabahar Port: India losing against China

I am flattered when I see visitors still viewing one of articles published in eurasiareview.com posted at this site in 2013. My point was that India has been over reacting about Chinese assistance extended in the construction of Gwadar port in Baluchistan province of Pakistan. India has been creating the hype that Chinese presence in Gwadar is not only a serious threat for India but would also give China extra leverage in the region. India also accused that China has acquired management control of Gwadar to use it as its naval base. This mantra was aimed at seeking support of United States and Russia, who consider China a major threat to their hegemony in the region.
Indian propaganda has been aimed at creating an impression that Afghanistan was highly unhappy with Pakistan and it is willing to join hands with India to move its shipments through Chabahar port. India also tried to pass on the message to Central Asian countries that the the port, located in warm waters, and the road and rail network being constructed would become a gateway for them to the rest of world. There are regular news being bashed about Iranian, Afghani and Indian cooperation.

However, one of the news quoting Iranian authorities has opened the Pandora box and unleashed the disinformation being spread by India. In a meeting, Hassan Nourian, Iran’s Consul General in India opened the Pandora box and exposed the extent of cooperation being extended by India.

Being a seasoned diplomat, Nourian expressed hope that India would act fast on the Chabahar port, which it had promised to build as far back as 2003. The message in between the lines was loud and clear that Iranians were upset with Indian attitude.

India’s exasperatingly slow progress in building the port — 11 years on, work has not even begun — has been a major source of irritation for the Iranians. After all, they gave the project to India rejecting a Chinese offer. Since then Chinese have finished building Gwadar port in Pakistan that is located 70 kilometers east of Chabahar.

It seems that Iranians have realized, though very late, the reason why India wanted the project — to thwart the Chinese. It has also become evident why the India is dragging its feet — for fear of annoying the US. For Iran, Chabahar port is of great economic importance and its great economic and strategic significance is also known to India. The port has the potential to open a route that leads to Afghanistan, a lucrative market today, and beyond, to the mineral-rich countries such as Kazakhstan and Turkmenistan.

As Iran is annoyed there emerges an opportunity for China, which is one of the biggest buyers of Iranian oil, seeking a port outside Strait of Hurmaz. India has also realized that the game is slipping out of its hands. If India loses Chabahar to the Chinese, it would greatly undermine much talked about Indian supremacy in the Indian Ocean.

Sri Lanka offered the Humbantota port development project to India, twice. The tsunami-ravaged port was in President Rajapaksa’s constituency and he was keen on re-building it. While India dithered, China jumped in. Humbantota has developed into a fine port. India ceded a key strategic space in its own backyard to China. No one could be blamed except India because UPA partner DMK didn’t let India do any development work in Sri Lanka. Now, Chabahar is going the Humbantota way.

While India drags its feet in Myanmar, China is moving in fast. While India (in fact, NHPC) dumped the two hydro-electric projects terming those “too expensive”, China is going ahead with as many as 33 projects. The port of Sittwe is critically important for India, for it would open up the North East. India did secure the project — it was given to the Essar Group. There have been delays, but the work is on. However, the project is only a part of what India had committed to doing, which was to build the entire multi-modal transport corridor — the Kaladan project. For parts of the project other than the port, even the tenders have not been floated.

Place after place in India’s neighborhood, including Afghanistan are slipping out of its dominance and going under Chinese influence. It is only because of dichotomy of Indian policies, it on one hand tries to extract all the possible benefits by making false promises and on the other hand desert those projects once United States and Russia enhance aid/assistance that helps in achieving the status of regional super power and creating its hegemony in South Asia.

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