President Donald Trump: An Ace Arms Seller

At the first destination, Saudi Arabia, U.S. President Donald Trump succeeded in signing an arms sale agreement worth US$350 billion.  He is likely to secure more orders on visits to Egypt, Jordan, Turkey and Israel. Arms sale in on the themes: campaign against ISIS and terrorism, challenge of Iran and turmoil in collapsing states of Syria and Yemen.  But the top item on the agenda is Israel-Palestinian peace process, which the president said was a top priority for his administration, through its recognition by Arabs.

Trump’s rhetoric is based on “Iran is a bigger threat as compared to Israel”.  The U.S. assault started with Iraq’s attack on Iran soon after the Islamic Revolution. Arab monarch’s were made to believe (by the U.S.) that the fall of Iran’s monarch was the beginning of their downfall. The war continued for almost a decade. Later on, Iraq was prompted to attack Kuwait, one of the best friends of Saudi Arabia.

In the aftermath of 9/11 U.S. attacked Afghanistan and Iraq. Further stringent sanctions were imposed on Iran. However, the superpowers agreed to withdraw these sanctions on the condition that Iran would roll back its nuclear program. To project Iran as enormous threat, it has been dragged into proxy wars to weaken it and to portray that “Iran is not a regional superpower”.

The need to create this perception aroused, after the emergence of Hezbollah, which smashed Israel’s military superiority.  Therefore, Iran has to be constantly engaged in wars. A question remains unanswered who initiate the assault, Iran or others? The western media has been arousing anti Iran sentiments by capitalizing Arab-Iran hatred.

The ultimate objective, which the U.S. wishes to achieve is “Recognition of Israel by Arabs”. The process started when Muhammad Anwar el-Sadat was president of Egypt and continued till his assassination on 6 October 1981. It seems most of the Arab are already convinced and are desperate for making the formal announcement. However, they have not forgotten the fate of Anwar Sadat.

One of the expectations is that at the end of Trump’s visit the formal announcement will come. Therefore, all the guns have to be aimed at Iran, which is often considered “the game spoiler”. But one has to try to find an answer to the question what is the cost of this recognition? Why Saudi Arabia  has to pay US$350 billion to give a boost to the U.S. economy?

What next for Iranian President Hassan Rouhani?

Incumbent President Hassan Rouhani, who sought re-election, won a landslide victory. He got 23.549 million votes out of a total of more than 41 million votes and his arch-rival Ebrahim Raisi got 15.786 million votes.

Iranians seeking greater freedoms have voted for President Hassan Rouhani, to secure second term. However, he is likely to face resistance by the hardliner.

There is perception that Rouhani will face more pressure in his second term as it is feared that the hardliners will create more problems for him.

Rouhani has decisively defeated Khamenei's protégé, hard-line judge Ebrahim Raisi, but the supreme leader still makes the ultimate decisions on policy, and his conservative faction still controls the judiciary and security forces.

They (hardliners) may re-assert their dominance at home by more confrontation abroad, by extending Iran's interventions in Iraq, Syria and elsewhere in the Middle East. They also fear more confrontational policy with the U.S. and Saudi Arabia.

However, certain quarters believe that since economy is the top priority of Supreme Leader Ali Khamenei, Rouhani's liberal economic policies are likely to get his endorsement, like the cautious support he got for the nuclear deal.

Rouhani, landslide victory in 2013 was on a promise to reduce Iran's diplomatic isolation, spent most of his time on the nuclear agreement with six powers that resulted in a lifting of most sanctions in return for curbs on Tehran's nuclear program.

Rouhani will have to find an accommodation with them, or end up like his reformist predecessor Mohammad Khatami, who whetted Iranians' appetite for change but failed to deliver it during two terms from 1997-2005.

The silver lining is that Rouhani has built his reputation as an establishment figure who could deliver some of the aims sought by reformists without alienating conservatives.

The added advantage is, Rouhani is a regime insider. He is loyal to the establishment. He is not a reformist but a bridge between hardliners and reformists.

Pakistan Stock Exchange witnesses massive selling by foreigners

Following the announcement of Pakistan’s up gradation to Emerging Market status in the MSCI Index, the market nosedived and continued the downward trend during the week ended 19^th May as investors resorted to profit‐taking. The benchmark index closed at 50,742, down 1.95%WoW. Average daily traded volumes fell by 1.45%WoW to about 350 million shares, with EPCL, DSL, WTL, LOTCHEM and SILK as volume leaders. Key news flows during the week were: 1) As per provisional estimates FY17 GDP growth came in at 5.28% as compared to 4.51% in FY16, missing budgeted target of 5.7%, 2) As per State Bank of Pakistan (SBP) current account deficit widened 205%YoY to US$7.247 billion during first ten months of current financial year, 3) SBP granted an operating license to state‐run Bank of China to meet the financing needs of CPEC projects, 4) Supreme Court has ordered National Refinery to pay Rs305 million to SBP for failing to pay Saudi Aramco its dues on time and 5) FBR has blocked Rs100 billion sales tax refunds and rolled back the Refund Payment Orders( RPOs), claimed by the textile sector filed from the tax period July 1, 2016 onwards. Stocks leading the bourse during the week were: LOTCHEM, POL, PPL, AGTL and HMB, while laggards were: PSMC, HUBC, UBL, CHCC and MCB. Foreign participation remained weak with outflows of US$16.4 million compared to outflows of US$2.46 million a week ago. SBP is scheduled to announce Monetary Policy on Saturday (May 20’17). It is anticipated to be a non‐event with policy rate expected to remain unchanged. Budget FY18, to be released at the end of next week, can present opportunities depending upon expected taxation measures. Moreover, on the international front, continuation of oil supply cuts in the upcoming OPEC meeting scheduled for 25^th May.

Pakistan has been reclassified as part of the MSCI Emerging Market (EM) Index effective June'17 with a lighter than expected pro forma weight of 0.14% (as of 20^th April'17 with prices impacted by Panama Leaks) in the MSCI EM Index contrary to expectations of close to a 0.19% weight as simulated by MSCI in April'16. If market momentum continues, Pakistan should regain weight in line with expectations in the next Semi‐Annual Index Review by MSCI. Additionally, passive fund flow allocation will be at more reflective weights and will likely continue through to the rebalancing of MSCI indexes in Novemver'17. The list of Tier-1 stocks as part of the reclassified MSCI Pakistan Index include: OGDC, HBL, UBL, MCB, LUCK and

ENGRO while 27 other names have been nominated for the small cap index. Pakistan's graduation is likely to have far‐positive implications where apart from increasing foreign visibility, it draws comparisons for multiple re‐rating akin to 2006‐2008. Macros lend further support (broad parallels can be drawn with macroeconomic indicators during the last time Pakistan was part of MSCI EM) where FY17‐18 GDP growth of 5.1%, driven primarily by development initiatives under CPEC, remains well above the EM average of 3.8%, warranting improved valuation. Near term the broader market is likely to focus on the Federal Budget FY18 (expected on 26^th May) where investors should expect targeted expansionary fiscal measures ahead of General Elections in 2018.

Current account deficit (CAD) for April'17 surged significantly to record at US$1.13 billion compared to US$546 million in the preceding month. Despite trade deficit shrinking by 2% on a MoM basis, CAD widened primarily on account of absence of CSF inflows in April'17 (vs. inflows of US$200 million in March'17), further aided by a sequential decline of 9%MoM in remittances. Consequently, the current account deficit for 10MFY17 reached US$7.2 billion (2.3% of GDP), up 205%YoY from US$2.4 billion in the corresponding period last year on the back of 1) rapidly growing trade deficit as imports accelerated (+16%YoY) while exports remained flat and 2) continuous decline in remittances (fall of 3%YoY as compared rise of 5.3%YoY during 10MFY16) on the back of lower inflows from GCC region (62% of total remittances). Moving forward, as trade deficit continues to widen along with a decline in remittances, current account deficit is expected to continue its downward spiral keeping deficit above US$8 billion (2.7% of GDP) in FY17.

In a recent meeting, ECC of the cabinet has decided to increase the quota of urea exports by another 300,000 to 600,000 tons owing to ample amount of urea inventory available in the country. The committee also extended the deadline for urea export to end October'17. Out of initial allocated quota of 300,000 tons, local manufacturers were hardly able to export 40,000 tons of the commodity to East Africa region at an estimated FOB price of US$230‐240/ton. In this regard, despite attractive quota allocation, the recent downtrend in international urea prices (down 30% to US$170/ ton breaking its last summer's low of US$171/ton touched in July'16) limited the attractiveness of exporting the excess urea inventory. In this backdrop, analysts believe urea exports are likely to remain unfeasible at current price levels. FFC is likely to be the most impacted whereas FATIMA remains largely immune given its lowest per bag manufacturing cost.

Pakistan Stock Exchange Benchmark Index Inching Towards 52,000 Level

Pakistan Stock market continued its rally ahead of the MSCI EM inclusion announcement with the benchmark index closing at the all‐time high level of 51,751points (gaining 3.81% WoW) for the week ended 12^th May 2017. Investors’ participation improved, evident from average daily trading volumes for the week increasing by 34.6%WoW to over 355 million shares. Major news flows during the week included: 1) the Federal Cabinet approved the Budget Strategy Paper for FY18 targeting 6% GDP growth along with plan to bring down fiscal deficit to 4% of GDP by FY20, believing that PML-N rule may continue post 2018 election, 2) Board of Directors of Pakistan Stock Exchange (PMX) approved the sale of remaining 20% shares of the exchange to the general public through IPO with floor price of Rs28/share, 3) trade deficit widened 40.12%YoY to US$26.5bn in 10MFY17 while remittances declined 2.79%YoY to US$15.596 billion in the same period, 4) budget deficit escalated to 3.7% of GDP in 9MFY17 (3.4% in 9MFY16) indicating that GoP will miss its 3.8% target for the current financial year and 5) cement dispatches during April’17 grew by 1.7%YoY to 3.57 million tons with cumulative 10MFY17 dispatches rising to 33.88 million tons. Major gainers during the week were: AICL, MCB, PPL, POL and NML; while losers were: LOTCHEM, HASCOL, AGTL, HCAR and MEBL. Foreign selling eased slightly with net outflows of US$2.46 million compared to US$19.27 million a week ago. Analysts maintain a positive outlook on market’s performance with Pakistan’s formal graduation to the EM space in the MSCI Semi‐Annual Review to be announced on 15^th of this month. In this backdrop, analysts favor (OGDC, HBL, UBL, MCB, LUCK, PSO, HUBC, ENGRO and NML). Moreover, incoming proposals for the upcoming Budget FY18 are likely to keep investors’ interest robust.

Declining oil prices eroded the global commodity index by 2.1%MoM during April'17. Oil prices declined due to the high stockpiles and abundant supplies despite the OPEC's cut in place. Following on, similar price trend was seen across major commodities with Steel (down 15%MoM on declining Chinese exports amid surging inventory levels), Urea (down 9%MoM on continuous capacity additions) and FAO Dairy index (down 3.3%MoM on account of peaking seasonal production) losing out the most. Cotton prices remained flat on strong demand from cotton importing countries, currently standing at their 3yr high. Going into May'17, oil producers meeting regarding extension of the agreed supply cut holds significant importance with implications spilling on to overall commodity price trend.

The significant rise in current account deficit (2% of GDP in 9MFY17 vs. 0.83% in comparable period) has emerged as a serious concern for the external account. This downward spiral is expected to continue in remainder of the fiscal year, with CAD expected to reach 2.7% of GDP‐ highest since FY09. This revision in CAD estimates is driven by: 1) worsening trade balance (projected decline of 34%YoY in FY17F) and 2) falling remittances (‐1.3%YoY in FY17). In addition, respite from this trend seems unlikely with CAD projected to further widen to 3.8% of GDP in FY18 in line with a growing trade deficit (19.7%YoY in FY18) due to higher petroleum and development‐related imports. This in turn remains a key concern for foreign exchange reserves which are projected to end FY17/FY18 at US$21 billion/US$17.5 billion as compared to US$23.1 billion in FY16), opening room for currency depreciation.

In line with ENGRO's diversification􀆟on strategy to realign towards relatively higher yielding energy vertical, the company through its subsidiary Kolachi Portgen (Pvt) Ltd ‐ KPL (100% stake) has recently filed a tariff petition with NEPRA for approval of US$392.3 million, 450MW (441.77MW net capacity) RLNG based Power Plant at Port Qasim, Karachi. Expected to commence commercial operations by the end of CY19 (27 months construction period from financial close), the project is expected to deliver IRR of 23.5% by transmitting 100% net capacity to KEL under a power purchase agreement (Letter of inter‐LOI issued by KEL) at an expected levelized tariff (at base case ‐ RLNG without compressor) of Rs7.09/KwH for a period of 30-years at 92% load factor.

Geopolitics to drive oil prices once again

I have picked up some news items from Oil & Energy Insider that support my hypothesis that US Shale output will continue to rise but some of the oil producing countries may become victim of commotion, anarchy and proxy wars. This will automatically reduce the supplies from these countries and there will be no pressure on OPEC to extend output cuts anymore.

Energy sector analysts are desperately awaits the outcome of OPEC’ meeting in Vienna scheduled for 25^th May. While the overwhelming expectation is that the cartel will agree on a six-month extension of the production cuts. However, now top OPEC officials are wondering if it will be enough. OPEC’s monthly report revised expected US shale growth sharply upwards, predicting output to increase 64 percent more than originally expected. That equates to projected growth from US shale of 950,000 bpd this year. OPEC fears that an extension will boost prices just enough to allow shale companies to lock in hedges once again, ensuring another wave of supply.

Tensions between Libya’s Presidential Council (PC) and the National Oil Corporation (NOC) are growing. The PC, which presently functions (that could change any day) as the head of state and military, and which is responsible for selecting members of the government, is ostensibly in control of investment decisions concerning Libyan oil. It was given this power via a resolution passed earlier this year. But the cracks in this set-up are already showing. The NOC is now accusing the PC of using the resolution to give German Wintershall a free pass in terms of compliance terms that it had agreed to with the NOC back in 2010. The NOC is now saying that the PC’s liberal stance on Wintershall is costing Libya $250 million because the dispute between the NOC and Wintershall has led to the shutdown of 160,000 bpd in production capacity. So, what does this mean for Libya? For the moment, production continues to rise. It’s now jumped to 780,000 bpd for the first time since 2014. And while elsewhere such a dispute might not rock any serious boats, in Libya this is the stuff of bloody changes in power. The NOC and PC are only hanging on to a modicum of control in the face of numerous militia factions that shift alliances with the wind. If the PC refuses to meet the NOC’s demand to revoke the resolution that gave it control over investment decisions, we could very easily see another shift in power in Libya. The NOC is bent on raising production a million bpd by the end of the year, and if it feels the PC is getting in its way, it may have the power to sideline it. The bottom line: The market responds in a knee-jerk fashion to any increase in production in Libya, but it’s important to keep in mind that Libya’s oil output on any given day is fragile at the very best.

For the first time in history, Tunisia has deployed armed forces to guard its oil and gas fields in the south, under threat from ongoing protests. Protests in the south have been going on for several years now, as the North African state tries to turn its economy around in the aftermath of the 2011 Arab Spring. But so far, planned government reforms have not been met with much enthusiasm. The south of the country still feels marginalized, and high unemployment—particularly among youth—and a perceived misdistribution of resource wealth are fanning some dangerous flames. Resource wealth, by regional comparison, is pretty low, but it’s enough to get the Tunisian youth up in arms. In 2013, Tunisia’s crude oil production hit a historic low of 60,000 bpd. By the end of 2016, it had fallen to 49,000 bpd. Right now, media puts production at 44,000 bpd, and if the youth is not appeased, even this paltry resource volume could be at risk.

Kenya’s first planned oil exports are also at risk. Residents of Kenya’s Turkana South have threatened to block the planned transportation of crude oil to Mombasa. Transportation of the oil from the Turkana fields is expected to start early next month, but locals are threatening to block it to buy time for more negotiations on revenue-sharing, job allocation and infrastructure deals. In mid-March, Kenya greenlighted a crude oil export agreement with Tullow Oil, Maersk International and Africa Oil, with pilot exports slated to start in June in a major milestone for the East African country, which was put on the oil map with a massive 2012 discovery. The companies have stored 70,000 barrels of crude oil, which will be used for part of the pilot program. Three companies announced that they will immediately begin transporting crude oil from the South Lokichar field in the prolific Turkana basin to the Kenyan Petroleum Refineries Limited (KPRL) at the port of Mombasa. From there, it will be exported to market in June—that is, unless protests get in the way. The South Lokichar field is being explored and developed by a joint venture between three companies. It is estimated that there are about a billion barrels of oil in the Lokichar area.