Pakistan seeking partnership with international warehousing and collateral management companies

State Bank of Pakistan (SBP) and all the financial institutions that extend loans to the agri sector deserve appreciation for meeting the indicative target of Rs600 billion set for FY16.

The amount disbursed FY16 is 16 percent higher as compared to FY15. The SBP deserves real appreciation because during this period farmers were not keen in boosting the output due to the lower commodity prices.

I am a staunch believer that if the Government of Pakistan (GoP) is serious in boosting GDP growth rate as well as achieving food security it has to remove the impediments affecting agri out. Analysts have the consensus that agri output can be doubled without bringing additional area under cultivation.

It is no secret that the biggest hurdle in achieving food security is colossal post-harvest losses ranging from 15 to 40 percent for different crops. Two factors responsible for these losses are: 1) absence of modern warehouses and 2) inefficient logistic system. Extension of loans to farmers may have helped in increasing production but certainly not helped in containing the post-harvest losses.

Nearly three years ago, the SBP had circulated the draft rules for Warehouse Receipt Financing. The second set of draft regulations has been issued by Securities & Exchange Commission of Pakistan (SECP) in June this year. While one may question the logic behind issue of regulations by both the apex regulators, the real point of concern is that the focus of both the regulators is not the two staple food grains i.e. wheat and rice.

It is highly deplorable that the total output of wheat, rice and maize touches 40 million tons annually but all sorts of warehouses put together can’t store even one-tenth of this quantity. Ironically, both the apex regulators are working hard on warehouse receipt financing, which can’t be achieved without construction of modern warehouses and creation of collateral management and certification companies.

Even more surprising is that SBP offers financing of up to 65 percent of civil works, but investors are not keen in availing this facility. It may be said that the entrepreneurs either fail to understand the whole concept or are scared to initiate such a venture, where dealing with feudal lords is considered highly risky.   

Has Pakistan-India animosity yielded any good?

During August both Pakistan and India will celebrate their  independence from the British Raj in 1947. Over the years both the countries have fought various wars, accumulated piles of conventional arms and also attained the status of ‘Atomic Powers’. They may boost of spending billions of dollars every year on buying arms but bulk of the population of both the countries live below the poverty line. My question to the rulers and citizens of both the countries is; has animosity between Pakistan and India yielded any good?

My own reply is a big no and I am sure that people from both the countries also share the same feelings, except the hawks present on either side of the border. These hawks are the product of British Raj that ruled this part of the world by following ‘divide and rule’ policy. While leaving the subcontinent it left a thorn, Kashmir. Those who don’t believe in my point of view must read the misdeeds of Toney Blair, British Prime Minister that led to attack on Iraq, a country still inferno after nearly 15 years.

While the citizens of Pakistan, India and Bangladesh may have some doubts about the economic potential of their homelands, British Raj knew the real worth when it made Indian subcontinent its colony. Even at that time the area was known as ‘Golden Sparrow’. In modern day term the area has robust agriculture and industry, treasures of minerals hard working people and above all a market comprising of billions of people.

Kindly allow me to say that had India and Pakistan not been spending billions of dollars on purchase of arms and instead using it for the development of infrastructure, educating their children and health care, these countries would have been ‘economic super powers’ and ahead of Malaysia, Singapore, Korea, Japan and even China. Spending least on education, healthcare and providing ‘safe drinking water’ have pushed these countries deeper in economic disorder, social malice and extremism.

If one looks at the most stable and fast growing economies, Germany emerges as the most outstanding one. When the Germans decided to unify East and West Germany, many critics termed it ‘dooms day’ for West Germany. However, it will be very hard to find the rudiments of East Germany now. I also say that one of the reasons Britain opted to quit European Union is also the legacy of British Raj. People of United Kingdom still don’t understand that they are no longer the super power. However, to prove their superiority they keep on interfering in the affairs of the countries commonly known as ‘Members of Common Wealth’.

Lately, anti-government demonstrations in Indian-Kashmir have attained a new hype. Hawks from both sides of the border claim that Kashmir belongs to them. The super powers and even the UN have failed in asking what the people of Kashmir want’. If one could recalled the issue of Sudan was resolved quickly and prior to that Cyprus trauma overcome, only because the super powers had the consensus.

One may ask why the super powers are not serious in resolving Kashmir issue. My own understanding is that super powers love to create disputes, develop rebel groups, provide them funds and arms to keep their armament factories running at full capacity.

Having watched the recent wars in Afghanistan, Iraq, Yemen and Syria and earlier wars in Vietnam and Korea, I will not hesitate even for a second to call these ‘Proxy Wars’. The irony is that rulers become a puppet of super powers and ultimately meet the fate of Saddam Husain, Anwar Sadat, Ziaul Haq, Indra Gandhi, Mujeeb-ur-Rehman and the list can continue.  

While the proxy wars bring nothing except destruction to the countries where these are being fought, super powers continue to grow stronger and have ample funds to promote proxy war. However, they usually hide their ugly faces behind the multilateral lenders and NGOs and talking about refugees issue. It is never too late to mend. People of the third world must realize that super powers thrive on proxy wars and they get nothing but destruction and killing of innocent people.

Pakistan market witnesses 23 percent increase in daily traded volume

The week ended August 05, 2016 was a volatile week as the benchmark PSX‐100 Index declined marginally to 39,390 levels. The decline was initially led by the banking sector in the backdrop of status quo in the monetary policy followed by selling pressures particularly in Cements on anticipated weaker dispatches attributable to Ramadan/Monsoon season slowdown effect. The point worth mentioning is that average daily traded volume increased by 23%WoW to 225 million shares. Leaders during the outgoing week were: PSMC, BAFL, KEL, SHEL and ICI, while laggards included: LUCK, PIOC, MLCF, KAPCO and MEBL.

Key developments during the week included: 1) Market Treasury Billions cut‐off yield posted a modest gain despite SBP maintaining interest rate unchanged, 2) Finance Minister and SBP governor alluded that there is no further IMF program under consideration, 3) PSMC announced increase in prices of its vehicle variants by 3% per unit in an attempt to maintain its profit margin, 4) Headline inflation rose by 4.12%YoY during the first month on the current financial and 5) SBP kept policy rate unchanged in its latest monetary policy statement.

Although, PSX‐100 Index is hovering near its highest levels, it is expected to remain volatile due to: 1) increase in political heat as opposition parties plan countrywide protests against the government, 2) weaker anticipated earnings in current result season owing to super tax and 3) volatile oil prices in spite of oversupply/surplus inventories. Financial result announcements of index heavyweights i.e. MCB, ABL and EFERT in upcoming week will likely to plunge Index downward on account of expected decline in earnings as a result of the imposition of super tax and impact of negative sector‐specific factors.

Recovering from initial Brexit shocks with major global economies vowing to unveil stimulus measures to boost economic growth, international equities rebounded sharply during the previous month with MSCI EM Index returning 4.9%MoM. In tandem, PSX‐100 Index closed the month 4.6%MoM higher at 39,529 points, just falling short of the 40,000 level. Volumes also depicted a healthy trend growing 9.8%MoM to average at 189.3 million shares during the month. MSCI led foreign interest was evident in July with foreigners buying equities worth US$26.8 million against a net selling of US$2.02 million a month ago (excluding foreign participation in EFERT divestment), building positions in Banks, Cements and OMCs. Amongst the main board, Automobiles and Parts, Cements and Commercial Banks garnered traction while Healthcare Services along with Multi‐utilities in the sideboard were key performers. Going forward, market's performance in Aug'16 is likely to be guided by the ongoing result season where we see strong earnings performance by Cements & Textiles. Banks are also expected to remain in the limelight with UBL's above expected 1QCY16 earnings setting the tone for the rest of the sector. That said, political pressures can come to the fore with opposition parties (PTI and PAT) likely to stage anti‐ government protests during the month.

In continuation of what has been a persistent trend now, Pakistan exports remained lackluster in June'16, declining to US$1.65bn. Similarly, FY16 exports were recorded at US$20.85 billion, marking a decline of 13%YoY from US$23.94 billion posted in the FY15. The fall came primarily on the back of a slowdown in textile and other commodity related sectors with textile and food group slipping by 8%YoY and 13%YoY respectively during the year. Going forward, despite anticipated weakness in Pak Rupee, analysts expect textile exports to remain under pressure primarily on: 1) slow Chinese demand, 2) adverse exchange rate limiting GSP plus benefits, 3) concerns of an economic slowdown in EU following Brexit and 4) low cotton production, down by 34%YoY.

Pakistan Stock Market Receives Higher Foreign Investment

During the week ended 29^th July 2016, the benchmark of Pakistan Stock Exchange PSX-100 closed at 39,529 levels – marking another record high level as results season commenced this week. Average daily trading volumes tapered slightly during the week to 182 million shares as compared to slightly more than 207 million a week ago. Foreign participation improved with an inflow of US$10.94 million as compared to an outflow of US$11.5 million a week ago. Leaders at the bourse were SHEL, NCL, LUCK, NML and ABL; while laggards included POL, PSMC, PPL, OGDC and EPCL. Volume leaders were DCL, AGL, SNGPL, DFML and TRG.
Key news flows for the week included: 1) SBP scheduled to announce its first monetary policy review on 30^th July, 2) the GoP and IMF commenced staff level discussions for the twelfth and last review under the EFF program, 3) Pakistan and Russia to start negotiations for laying 1,100km LNG pipeline with an estimated cost of US$2 billion next week where the first phase of the project is scheduled to complete by December next year, 4) ECC allowed BAFL to remit US$27.2 million to set up branch in UAE, 5) DRAP approved price increments for scheduled drugs, non‐scheduled drugs and lower priced drugs under the Drug Pricing Policy and 6) Mari Petroleum’s Managing Director stated that the company plans to establish a 400MW power plant at Dharki/Sadiqabad with an estimated cost of US$400 million.

The key event to track for next week will be the monetary policy announcement on the weekend. The expectations remain split between status quo and 25bps reduction in the policy rate. CPI inflation for July’16 to be released next week will also help to set expectations for further monetary policy action. Earnings season is likely to be the guiding factor over the near term with key results likely to be announced in the coming month. On the global front the further decline in international crude oil prices can keep the pressure on the Oil & Gas sector.

Reflecting a slowdown in revenues and tighter gross margin (GM), EFOODS is likely to post profit after tax of Rs793 million (EPS: Rs1.04) for 2QCY16 earnings, down 13%YoY/28%QoQ. This will effectively take 1HCY16F earnings to Rs1.90 billion (EPS: Rs2.48) as against Rs1.97 billion (EPS: Rs2.58) for 1HCY15. In this regard, intensifying competition in the dairy sector is likely to lower revenues by 6%YoY and remain flat sequentially. GM is also anticipated to take a hit (expected to go down by 140 bps YoY in 1HCY16F) on account of higher raw milk prices in lean season. Going forward,the pace of earnings growth is likely to come off for EFOODS (3-year earnings CAGR of 11%) where volume saturation in the industry along with recovery in dairy prices poses downside risks to earnings. Analysts believe price performance will more be a function of EFOODS' performance ipost acquisition by Royal Friesland Company.

The listed banking sector has shed 14.9% CYTD struggling on account of lower interest rate with reversal expectations now pushed forward beyond 1HCY17. Banking spreads continue to remain at their multi‐year lows, while advances growth has also failed to pick up any significant pace. In addition, the continuation of super tax is another impediment in earnings growth in an already challenging operating environment. These factors are likely to manifest in the upcoming 1HCY16F results where analysts expect earnings surprise can come from higher utilization of capital gains (as seen in 1QCY16) and lower than expected credit costs (particularly in case of National Bank of Pakistan). In the backdrop of lower earnings expectations, analysts continue to look favorably towards fundamentally resilient HBL and UBL, based on: 1) a superior ROE profile, 2) keen focus on growing low cost current accounts, 3) diversified income streams and 4) ability to capture CPEC related investments.

Are India Pakistan likely to fight another war on Kashmir?

This morning when I went though Pakistan’s leading English newspaper Dawn, two headlines gave me jittering feeling Kashmir can never become part of Pakistan, Sushma tells Nawaz and Waiting for the day Kashmir becomes Pakistan: Nawaz.

This prompted me to once again read one of blogs http://shkazmipk.blogspot.com/2013/02/kashmir-can-initiate-third-world-war.html posted as back as in February 2013. Its caption was ‘Kashmir Can Initiate Third War’. I still remember many of my critics termed this absurd.  Despite lapse of three years, I stand firm on my words that the Kashmir dispute is not over land but water. The conclusion was based on the overwhelming perception that the third war will be fought over water.

I subscribe to the theory that British Raj prevailed over the world following ‘divide and rule’ policy, which is being followed by the US now. British Raj had left two scars on this planet, Kashmir and Palestine, which are oozing blood for more than six decades.

While going through local and international publications and watching leading English TV channels, I get a feeling that the arms sellers are creating new conflicts to initiate wars. I read a news item with profound grief about the killing of over 80 Hazaras in Afghanistan. Publications are filled with rising tension between India and Pakistan, Afghanistan and Pakistan and Iran and Pakistan. I often wonder is the ground being created for some proxy wars in the region.

I strongly believe that any encounter between India and Pakistan could prove disastrous because both the countries now suffer from war mania, may be because they suffer from complacency of being ‘an atomic power’. Dropping a few atomic bombs may be too easy and the objective could be achieved in few minutes. However, do the war mongers ever bother to understand the devastating effects of this adventurism?

Pakistan stock market closes week almost flat

For the week ended July 22, 2016 the benchmark of Pakistan Stock Exchange PSX-100 closed almost flat as compared to a week ago. The market managed to close above 39,000. However, the overall performance was not disappointing. CYTD returns were reported at above 19 percent. Additionally, the month to date foreign inflow of US$31.7 million is a strong indicator for foreign investments picking pace, following Pakistan’s re‐entry into the EM club.

News flow impacting market during the week included: 1) in the T‐Bill auction conducted on Wednesday, cut‐off yields for 3, 6 and 12 months posted decline, where banks aggressively participated in the auction with bids amounting to Rs740.9 billion against the target of Rs200 billion, 2) net inflow of almost $600 million from China, foreign direct investment (FDI) in Pakistan surged 38.8% as Pakistan received FDI of US$1.28 billion during 2015-16, which was US$358.2 million higher than receipts a year ago.The unusual jump in FDI in the last month of 2015‐16 was on the back of an inflow of US$138.5 million in the telecommunications sector, 3) SECP has formally sent the final draft of the Companies Bill, 2016 to the Ministry of Finance for initiating necessary legislative process and its approval by the Parliament and 4) Textile exports went down by one billion dollars during last financial year due to massive decline in cotton crop production and slowdown in the economy of China pushing Pakistan's textiles and clothing exports to US$12.45 billion during FY16.

Leaders exhibiting performance over the week were: ASTL, NCL, and PSMC (+7.1%WoW), while laggards were FFBL, DAWH and HASCOL. Average daily traded volume grew by 7%WoW to 207 million shares, where SNGP, DFML and PAEL were the volume leaders.

Considering the stellar run‐up in the last quarter of the outgoing FY16 gaining 10.7% during the period), analysts expect the market to enter a consolidation phase. Directionless trading in the absence of major triggers may prevail. Market participants are advised to closely follow: 1) political developments as the opposition plans to protest against inaction on Panama leaks investigations, 2) fertilizer offtake numbers for the month of June'16, gauging the sensitivity of recent subsidies on demand and, 3) details of GoP policy measures in response to the final meeting with the IMF over the release of EFF's last tranche (negotiations start July 27th). Additionally, earnings announcement may fuel strong sentiment for consensus beating stocks.

Firming up in June'16, the global commodity index rose by 3.5%MoM. While losing some ground on account of Brexit and a strengthening US$ as a consequence, oil prices consolidated around US$48/bbl whereas prices of coal were up 6.4%MoM on supply disruptions in major markets and cotton witnessed easing supply concerns depicted strength during the month under review. Steel and Urea prices declined on account of excess supplies amid a weak demand outlook. While recovery has been steady during June’16, most commodity prices still remain at their multi‐year lows. Analysts expect prices to consolidate going forward; however a sustainable reversal of the downtrend remains contingent on an improving demand scenario.

Current Account deficit for June'16 was recorded at US$61 million lower than US$252 million in June'15 (US$792 million in May'16) where higher trade deficit was countered by healthy remittance flow for the month was US$2.07 billion, up 13.8%YoY. This implies, FY16 current account marking a deficit of US$2.52 billion, lower 6.8%YoY reflecting: 1) expanding trade deficit, up +8%YoY as weak exports restricted savings from oil imports, 2) steady remittance inflows (up 6.4%YoY) and 3) US$713 million CSF payments. Going forward, analysts expect slight pressures to mount and project current account to post deficit of US$5.1 billion in FY17 with trade deficit increase of 11%YoY: on 1) US$45/bbl assumption for crude oil and 2) limited recovery in exports on low cost competitiveness. However, positive surprises can emerge if CSF payments materialize (US$900 million approved for next year) and on higher than expected growth in remittances.

Pakistan Market: Daily trading volume up 35 percent

The benchmark of Pakistan Stock Exchange PSX-100 resumed its pre-Brexit bullish momentum after Eid holidays, touching an all-time high to close at 39,188 level, up 3.7%WoW. As concerns eased slightly, the market was further supported by additional stimulus announced by Japan and stronger data from the U.S. coupled with recovery in crude oil prices, all favorable for the local bourse. Overall activity at the market improved drastically, average daily traded volume for the week increased by 35.5%WoW to 193.8 million shares.

 Key news flows during the week included: 1) Privatization Commission approved offloading of the government remaining 40.25% stake in KAPCO and Expressions of Interest from prospective bidders was invited, 2) three foreign investors including Shanghai Stock Exchange (SSE) have expressed interest in acquiring a stake of up to 40% in the Pakistan Stock Exchange, 3) total deposits of the banking industry crossed Rs10 trillion as of Jun'16 , up 10%YoY as compared to Rs9.14 trillion at the end of last financial year, 4) GoP announced a plan to lay an oil pipeline from Gwadar to China for the export of crude and task given to state construction firm Frontier Works Organization, and 5) GoP raised over Rs236 billion through auction of PIBs with cut-off yields for 3, 5 and 10-year papers declining noticeably.

Performance leaders during the week were: HASCOL, INDU, PIOC and SNGP; while laggards included: EFOODS, ABL, KAPCO and FATIMA. Volume leaders during the week: KEL, SNGP, DCL, EFERT and TRG. Foreign participation improved significantly where net inflow during the week amounted to US$21.4 million as against net outflow of US$1.2 million in last five sessions.

The market is still likely to come under pressure due to the global developments but analysts believe it could sustain current levels over the short term. Support should come from results season commencing next week where major sectors are expected to post strong earnings performance. However, risks for a pullback will linger in the form of: 1) political developments gaining prominence, 2) oil price swings likely to impact the local market, 2) another rate cut in the upcoming monetary policy proving negative for banking scrips. On the global front, upcoming US FOMC meeting and development on UK‐EU negotiations need to be tracked with implications for growing participation.

The IMF recently released its staff level report for the second last review under the IMF EFF stressing the country to continue structural reforms beyond the program's conclusion. Commending Pakistan on its strong performance on the program so far, the report also reiterates largely positive macro outlook though risks remain in the form of weak trade dynamics, policy slippages and political noise. With only one review left, IMF has added two structural benchmarks related to energy sector namely: 1) KAPCO's sell‐off and 2) updating plan for the resolution of circular debt. The twelfth review entailing disbursement of US$100 million is scheduled for end‐Sep'16 where successful achievement of targets would mark the conclusion of the facility ‐ the first for Pakistan. In line with our expectations, GoP will not be entering a new IMF agreement owing to stable external metrics however, GoP is expected to remain engaged in a consultative process with the IMF though without imposition of targets.