Economic Analysis (Pakistan)

Economic Analysis (Pakistan)
Equity Market (KSE)
The Karachi Stock Exchange (KSE) is the largest and oldest stock exchange. It is a premier stock exchange in Pakistan which offers a range of high quality products and services, which has enabled it to become the leading center of capital formation in the country. It offers companies and investors an efficient and transparent securities market, for raising capital and achieving investment objectives. Companies listed on KSE are Pakistan’s most well known, largest and most established companies. The exchange is owned by 200 owners with 651 companies listed. KSE has 4 indices KSE 100, KSE 30, KSE all share index and KMI 30. It also facilitates electronic trading and its total market capitalization as of June 30th 2009 is $ 26.15 billion. KSE trades in equities, deliverable futures contracts, cash settled future contracts and stock index futures contracts.
The year 2008-09 was a difficult year for Pakistan as GDP growth slowed; inflation rates rose and discount rates also followed an upward trend. Also the rapidly rising oil prices and law and order instability made matters even worse. The international and domestic volatility led to a series of events at KSE during the year. The KSE 100 index declined 60% from 12,289 points on July 1, 2008 to 4,815 points on January 26, 2009. In order to prevent widespread risk to the entire financial system, restrictions were imposed. These restrictions along with low investor confidence, and a lack of liquidity in the market resulted in a low average daily turnover of 115.64 million shares in 2008-09 compared to 256.34 million shares during 2007-08, depicting 55% decline. The year 2008-09 was a challenging one for KSE as the revenues declined 47% from Rs.1716 million to Rs. 914 million. Poor domestic and international market conditions, drastic increase in discount rate, lack of liquidity and floor imposition on the prices of securities led to a significant reduction in trading volumes to 27,142 million from 63,316 million last year.
Now giving an overlook to year 2009-2010, at the end of March 2010 the paid up capital at KSE amounted to Rs. 894.2 billion. Aggregate market capitalization as at end of March stood at Rs. 2890 billion. Market capitalization to GDP is currently just under 20%, which is low by comparison with many countries in Pakistan’s peer reference group. The period of July 09 to March 10 saw a recovery phase in the country’s capital market. The benchmark KSE-100 index rose 33% in line with the recovery being faced by the global equity markets. From the recent trough faced in January 2009, due to the aftermath of floor imposition at the KSE in late 2008, the KSE 100 rose up to 107%. Also a great deal of foreign inflow from the period of July to March amounting to US$ 440 million has greatly powered the index. But the volumes traded remained a fraction of period prior 2008. A major reason for reduced liquidity in the market is the absence of leveraged products. Mainly on the basis of foreign buying, the KSE 100 has risen 74% since its trough in January 2009, it has gained 33% since the start of the fiscal year 2009 to 2010. The Foreign Portfolio Investment has also risen sharply for July to March (2009-10). Other positives during 2009-2010 have been the restoration of macroeconomic stability after the BOP crisis, the IMF program, the upgrading of Pakistan’s rating by Standard and Poor’s. The KSE 100 index crossed the 10,000 mark on 12th March 2010 after a period of 18 months.
Important measures taken at KSE in 2009 include the following:
• Introduction of corporate Bonds Automated Trading System.
• Data Vending and Launch of Mobile KSE Automated Trading System (mKats)
• Implementation of internationally accepted industry classification Benchmark a jointly developed.
• Classification system launched by FTSE Group and Dow Jones Index.
• Risk Management.
• Introduction of Client Level Margining Regime.
• Restructuring of Net Capital Balance requirement.
• Pre‐settlement mechanism in Ready & Deliverable Future Contract Market.
• Introduction of Exposure Dropout Facility during Trading Hours.
• Introduction of Client wise cash deposits allocation against exposure margin and losses.
• Change in Penalty requirement on Net Capital Balance Certificate.










Interest Rates and Inflation:
The interest rate has been considerably high during the recent time periods, it has been 12.5% from November 2009 to May 2010, and this high interest rate has contributed greatly to the economic downturn Pakistan has been facing. In around January 2010 it was expected that the State Bank of Pakistan will reduce the discount rate by 100 basis point or 1% in the upcoming monetary policy statement along with some level of contraction in macroeconomic imbalances and improvement in monetary aggregates. After the expected revision the new interest rate would have been 11.5% from 12.5%. A cut in the interest rate was expected due to stability in food and other commodity prices. Even though inflation remained in double digits, the stability in the exchanged rate also contributed to the expectation of a reduced interest rate.
But on the flip side the interest rates followed an upward trend rather than a downward trend, with the size of government borrowings from commercial rates to be of Rs. 305 billion or 1.8% of GDP for year 2011 against an estimated rate of 1%. These borrowings are expected to remain high until or unless the release of financial inflows and privatization receipts from external and domestic sources are not materialized in the upcoming fiscal year. In the expected fiscal scenario along with an increase in the inflation numbers to be remained in double digits, significantly above the government target of 9.5%, there is no possibility for the central bank to lower down the rates. Therefore the interest rates are not expected to reduce at least in the next two quarters of upcoming financial year, this was stated in a report issued by the Standard Chartered Bank.
Inflation is one of the menaces that have contributed immensely to the current economic condition of Pakistan. After declining for much of 2009, inflationary pressure has intensified lately due to number of adverse events. From a low of 8.9% in October 2009, the Consumer Price index (CPI) has now increased to 13.3% as of April 2010. Food inflation has also remained high in these past few months increasing from 7.5% in Oct 2009 to 14.5% now. When considering the Non-food items, here again an increase in inflation is seen from 10% in Oct 09 to 12.2% in April 2010. On a period average basis the overall inflation recorded for July to April is of 11.5%. When taking in account the inflationary pressures it is very important to consider all major indices. The Wholesale Price Index (WPI) has risen steeply from 0.3% in August 2009 to 22% in April 2010. Similarly the Sensitive Price Index (SPI) has recorded an increase to 16.7% in April from 6.7% in Oct 2009. However inflation for 2010-11 is targeted at 8% rather than the central bank’s forecast of between 11% to 12% for the current fiscal year.
A sharp spike in global commodity prices, mainly relating to food and energy, which persisted since the beginning of 2009, has exerted a strong upward pressure on the domestic price level. Also a 70% increase in international oil prices between April 2009 to 2010 and a 49% increase in IMF commodity price index have also contributed greatly. Other factors that contributed to an increase in inflation over the two years consist of weakening of the Rupee over the past two years and also increase in domestic prices of wheat

GDP and Economic indicators:
The economy during current fiscal year 2008-09 registered a growth of just 2% against the budgetary target of 5.5% and downward revised target of 2.5% and only agriculture sector showed a positive growth of 4.7% against the target of 3.7%. The country has been pushed back in to the times of low growth, unemployment, higher inflation and higher interest rate regime leaving all sectors of the economy to suffer. During this period almost all the indicators were found in the red zone due to world’s financial crisis.
A measure of macroeconomic stability achieved over the past two years has kindled a moderate recovery in the economy, despite one of the most serious economic crisis in country’s recent history. The economy grew by 4.1% in year 2009-10. For the outgoing year the Agriculture sector grew an estimated 2%, against a target of 3.8%. Industrial output expanded by 4.9%, with large scale manufacturing showing a growth of 4.4%. Also the services sector grew by 4.6% as compared to 1.6% in 2008-09. Commodity producing sectors expanded at a pace of 3.6%.There were several developments that caused this moderate economic growth, such as crop support prices policies with higher work remittances which sustained aggregate demand in the economy, improvement in business confidence, expansionary fiscal stance and a small recovery in global economy.
Now the reports and predictions made for the year 2010-11 mostly state that, Pakistan is set to grow at 4.5% in the beginning of July in the year 2010-11 against the 4.1% during the current fiscal year. Agriculture growth is targeted to be 3.8%, manufacturing growth is expected to be 5.6% and the services sector is targeted to expand to 4.7%. The government aims the fiscal deficit of between 4 to 4.2% of GDP in 2011 as compared to earlier forecast of 5.1%.

Economic Indicators (2009-2010) July-May
Exports
(Billion$) Imports
(Billion$) Trade Balance
(Billions$) FDI
(Million$) Foreign investment
(Million$) Work remittances
(Billion$) Forex reserves
(Billion$) Exchange rate
(Rs./US$) GDP Infla-tion
1.75 3.36 -1.60 2030.7 1896.9 8.064 16.013 85.4 2% 13.3%