Thursday, January 31, 2008

Emaar Boss Bullish on Pakistan

Talking with CNBC today, Mohamed Ali Alabbar, Chairman of Dubai-based Emaar Properties, said he believes Pakistan represents a great investment opportunity for his company as it goes global. In fact, he repeated it twice to convince Erin Burnett, the CNBC anchor, who appeared surprised. Alabbar further said Emaar sold a major project yesterday within hours of launch in Pakistan.

A massive real estate project valued at $43b by Emaar is underway in Pakistan to develop two island resorts near Karachi. This is Emaar's single largest project and supersedes the $26.7 billion King Abdullah Economic City project in Saudi Arabia announced in 2006. This project will include office buildings, shopping malls, restaurants, hotels, apartments, golf courses, and beaches. The two islands will be self-contained cities spread over 30,000 acres of land.

Emaar has already energized the Pakistani economy with development projects worth $2.4 billion. Emaar has unveiled its first master planned community in the country — Canyon Views in Islamabad. The company has also announced the highlands project in Islamabad and Crescent Bay in Karachi. It has also signed a memorandum of understanding (MoU) with Port Qasim Authority for a mixed-use land development comprising residential, retail, commercial and hospitality components.

Another Dubai-based company, Abraaj Capital, has acquired land in Karachi's financial district to build Karachi Financial Towers (twin-towers) to cater to the booming banking sector in Pakistan.

Apart from creating new job opportunities for Pakistanis, these projects will support ancilliary industries and strengthen foreign investment inflow into the country.

Arif Masud Naqvi Vice-Chairman of Dubai based Abraaj Capital said that Pakistan is a country of enormous business potential, and investors are comfortable and see opportunity rather than risk.

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ASEAN Architect Suharto Passes On

Last Sunday was a sad and a historic day in Southeast Asia as General Suharto, a key architect of ASEAN, left this world at age 86. It seemed like any other day in Indonesia and the world. There was a state funeral but few world leaders mourned his passing. However, the General's close friends and co-architects of ASEAN, Singapore's Lee Kwan Yu and Malaysia's Mahathir Muhammad, reportedly made a visit to his deathbed and wept.

Lee, 84, and Mahathir, 82, paid what they knew would be their final respects to a former comrade-in-power, in a moment pregnant with symbolism as the curtain was drawing on a key regional actor. The death of Suharto, the most senior of the three ASEAN octogenarians, marks the beginning of the end of a defining generation of regional leaders, according to a Yang Razali Kassi of Pacific CSIS.

General Suharto leaves a mixed legacy for Indonesia and the entire region. He ruled with a firm hand over a diverse and sprawling country. Many will remember him for the rapid progress made by Indonesia and the ASEAN region that transformed both from agrarian and natural resource based economies to modern industrial economies. Others will recall the deaths of millions of Indonesians in the Communist purge, the human rights abuses in Indonesia and the horrors in East Timor and Aceh that took place on his watch.

Lee Kwan Yu and Mahathir Muhammad, the other two important architects of ASEAN, share many things in common with General Suharto. It was, therefore, quite natural for them to weep at the General's deathbed and think about their own legacies.

The questions that will continue to be asked are: Could the ASEAN economic transformation have been achieved without such leaders? Are other leaders elsewhere in the world inspired or horrified by such legacies? Would countries such as Pakistan be transformed economically in the same way? Are there better days ahead for them?

Here's a video clip on Suharto's legacy:

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Wednesday, January 30, 2008

Internet Outage Affects India, Pakistan, Middle East

Internet services have been disrupted in parts of the Middle East after damage to an undersea cable in the Mediterranean. There was disruption to 70% of the nationwide network in Egypt, a government official told Reuters. There was also disruption in the United Arab Emirates (UAE), Kuwait and Saudi Arabia, reported the Associated Press. India also suffered up to 60% disruption, a national industry body told Reuters news agency.
Blogger Masud Reza from Pakistan is reporting that Pakistan is also affected by this outage. Mesud's post says:
"At approx. 11:30am today, the SMW4 Segment 4 Sumbarine Cable went down due to a fiber cut between Marseille and Palermo due to which the Internet connectivity in Pakistan is severely affected.
At this moment, TWA1 customers are suffering the most. PTCL has switched it's Internet traffic from SMW4 to SMW3.
Let's hope that this fault is repaired soon since degraded Internet service cripples internet for business.
Update: A ship has left Italy for repairing the fault. However, timelines indicated by SMW4 are anywhere from twelve to fourteen days!!"

This latest disruption reminds me of June 2005 outage of ALL Internet access in Pakistan due to damage to the lone undersea fiber optic cable in the Arabian Sea connecting Pakistan with the rest of the world. This cable is owned by a 92-nation international consortium and operated by SingTel, the Singapore telecommunications company. There were satellite link but these links have very limited bandwidth. Even though the number of Internet users in Pakistan is relatively small at about 15-20 million, the impact on business was disproportionate. Traders on KSE reported as much as 80% drop in trading volume from this outage. All call center activities and other BPO vendors were severely affected.

In February 2006, there was another brief disruption when Pakistan’s first undersea fiber optic cable, SMW3, was damaged causing interruption in the country’s Internet and voice traffic. However, there was no breakdown in any part of the country, as the recently-commissioned submarine cable, SMW4, was fully operational. Since then, yet another submarine cable, TWA1, has also been added. While the two additional cables have made Pakistan less vulnerable, the growing use and bandwidth requirements in Pakistan will continue to strain these cables, unless additional capacity is added on a regular basis.

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Tuesday, January 29, 2008

Philip Morris Eyes Pakistan Smokers

Philip Morris International, the international unit of the US tobacco giant Philip Morris often described as a merchant of death, is building a new massive cigarette plant in Pakistan.
Philip Morris is expected to spin off PMI as an independent company to be unconstrained by the U.S. tobacco regulations and out of reach of American litigators. Importantly, its practices would no longer be limited by American public opinion, paving the way for trying out new products.

As the smoking rates in developed countries have slowly declined, they have risen dramatically in some developing counties, where PMI is a major player. These include Pakistan (up 42% since 2001), Ukraine (up 36%) and Argentina (up 18%), according to the Wall Street Journal.

The World Health Organization's Framework Convention on Tobacco Control, an international public-health treaty, has 152 participating countries, including China, Brazil and Pakistan. While it has led to greater regulation in many of the world's markets, countries such as Indonesia and Russia haven't signed on. It should be noted that Pakistan was derisively named as "The Winner of Marlboro Man of The Year Award" by anti-tobacco activists for stalling these negotiations but ultimately signed the treaty.

In addition to targeting Pakistan, India, Brazil and Russia, one of PMI's immediate goals is to harness the huge potential of China's smoking population, as well as some of that country's own brands, reports the Wall Street Journal.

After negotiating for three years, PMI is expected this year to begin marketing three Chinese brands. The smokes -- selected from hundreds of varieties produced by state-run China National Tobacco Corp. -- will be sold in Central Europe, Eastern Europe and Latin America, according to PMI.

The launch is planned for sometime in the next six months. It is part of a December 2005 deal in which Philip Morris agreed to market Chinese brands internationally in exchange for the right to produce its own Marlboro brand at state-owned factories. At the moment, Philip Morris is limited to importing its cigarettes for sale in China and is restricted by stringent quotas.

While Philip Morris investments in Pakistan, Brazil, Russia, India and China are expected to bring in much-needed capital and create thousands of new jobs, the proven health risks posed by smoking will also cause widespread disease and death in future years. This does not appear to be a good bargain for these emerging economies with young populations.

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Monday, January 28, 2008

Pakistan's Power Crisis

Pakistan’s economy has recently been growing at 7-8% per year, doubling its GDP over the last 7 years. The industrial growth rate has been closer to 12.5% per year during this period, contributing 38% of the total economic output of Pakistan. Per capita energy consumption of the country is estimated at 14 million Btu, which is about the same as India's but only a fraction of other industrializing economies in the region such as Thailand and Malaysia, according to the US Dept of Energy 2006 report. To put it in perspective, the average world citizen uses about 65 million BTUs and an average American consumes 352 million BTUs. With 40% of the Pakistani households that have yet to receive electricity, and only 18% of the households that have access to pipeline gas, the energy sector is expected to play a critical role in economic and social development. With this growth comes higher energy consumption and stronger pressures on the country’s energy resources. At present, natural gas and oil supply the bulk (80 percent) of Pakistan’s energy needs. However, the consumption of those energy sources vastly exceeds the supply. For instance, Pakistan currently produces only 18.3 percent of the oil it consumes, fostering a dependency on imports that places considerable strain on the country’s financial position. On the other hand, hydro and coal are perhaps underutilized today, as Pakistan has ample potential supplies of both.

Pakistan’s rising energy demand, according to the U.S. Department of State’s Paul Simons, creates opportunities for regional cooperation. To this end, the U.S. Trade and Development Agency convened a meeting a couple of years ago in Istanbul that produced an agreement on examining options for exporting Central Asian electricity to Pakistan. It should be noted here that US does not favorably look upon any Iran-Pakistan cooperation in the energy sector. At an Asia Program event organized by Wilson Center in 2006, Vladislav Vucetic of the World Bank provided a troubling assessment of the state of Pakistan’s electricity sector—demand is approaching maximum production capacity, while institutional capacity for policy development and implementation remains low. Worse, failing to resolve these problems may cause investment delays and hamper Pakistan’s economic growth. Sanjeev Minocha of the IFC, a major source of private sector financing, noted the paucity of domestic private sector initiatives in Pakistan. The IFC has sought to raise investor confidence through its funding of private Pakistani energy companies, including the new firm Dewan Petroleum. Ultimately, stated Minocha, it is crucial that investment projects take into account the interests of local communities.

In early 2008, Pakistan's industrial consumers are facing an electric power deficit of up to 3,600 megawatts (MW)due to low water levels at hydroelectric dams and damage to two main power lines attacked during the three days of violence following Bhutto's assassination. More than anything, this represents the failure of long term energy planning to go with the economic growth forecasts.

Among the temporary issues exacerbating the larger power crisis, the two main power transmission lines were blown up in January 2008 in Sind, creating a shortfall of 1,000 MW. The business community complain that lopsided and unplanned shutdowns have resulted in closures in almost all industries. Subsequent production losses will be reflected in further pressure on exports and lead to increased imports.

Water levels have fallen by 32% compared with last year, according to the Pakistan Electric Power Company (PEPCO). Pakistan's current installed capacity is around 19,845 MW, of which around 20% is hydroelectric. Much of the rest is thermal, fueled primarily by gas and oil. PEPCO also blames independent power producers (IPPs) for the electricity crisis, as they have been able to give PEPCO only 3,800 MW on average out of 5,800 MW of confirmed capacity. Most of the IPPs are running fuel stocks below the required minimum of 21 days.

While there are many economic successes of the Musharraf-Aziz administration in terms of reviving the Pakistani economy and putting it on a growth path again, the energy sector represents its biggest failure. This failure has the potential to threaten Pakistan's economic future, unless immediate steps are taken to bring this crisis under control over the next few years.

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Saturday, January 26, 2008

Pakistan: A Magnet For Foreign Investors?

Extreme Investing or Safe Haven?
Some call it "Extreme Investing". Call it by any name, but international investors have discovered Pakistan as an attractive destination.
Referring to the recent upsurge in violence, Bank Muscat CEO Ali Issa said, "We are not worried about our investment in Pakistan, we think it's just a passing phase."
Chief Strategist for Merrill Lynch Mark Matthews is the most bullish about Pakistan, calling it a “safe haven” for investors. Matthews believes Benazir Bhutto's death is "on the whole, largely irrelevant to the economy, which like other places, is what really moves the stock market." He says Pakistan represents the “biggest information arbitrage,” which in its crudest terms, means that body bags are good for stock pickers. He reckons that the slew of bad news from Pakistan is diverting people’s attention from the fact that the Pakistan economy is humming along nicely, with growth forecast to reach 7% this year, a repeat of 2007, and stocks yielding an average of 6% dividend yield. Karachi was up an impressive 40% last year, and would have closed even higher had it not been for the tragic assassination of former Prime Minister Benazir Bhutto in December which trashed the market.
Pakistan’s Telecom Sector
Telecom sector is attracting the largest share of foreign direct investment in Pakistan. Foreign investors pumped in $364m into it during July-Sept 2007 quarter, according to the latest figures released by Pakistan Telecommunications Authority. The total FDI in Pakistan for this 3-month period was $962.5m.
The number of cellular subscribers in Pakistan has crossed 76m in Dec, 2007, from 500,000 in 2004. According to Business Recorder, Pakistan's financial daily, most forecasters believe that the upward trend will continue in the next 5 years because of the huge market potential, particularly in the rural areas where the build-out has yet to happen. Operators such as Wateen (with Motorola) are planning a large Wimax roll-out to improve voice and high bandwidth data access across the country. The biggest mobile operators in Pakistan include Mobilink with 30m subscribers, Ufone with 16m, Telenor with 14m, Warid with 13m and Paktel with 1m. It is estimated that the telecom sector has added at least 300,000 jobs in the last few years.
Financial Services & Infrastructure
While Telecom has been the hottest sector, here are some of the recent deals making the news:
1. Nomura announced it would team up with an Omani bank to buy Saudi Pak Bank for US$200m.
2. Barclay’s Bank received a banking license in Pakistan and will open up 10 branches with US$100m.
3. International Petroleum Investment, a UAE company, announced it would build a US$5b refinery.
4. Hutchison Port Holdings announced it will build a US$1b deep water container port.
5. Singapore’s Temasek, through NIB Bank, is buying PICIC.
6. Philip Morris is building a new plant, and China Mobile is hiring thousands of people, as it doubles its base stations in the country.
Private Equity Funds
Recent launch of a private equity fund focused on Pakistan is another indication of continuing investor interest in Pakistan economy as a magnet for investors. This fund, solely dedicated to investing in Pakistan was closed December 2007, capping a year in which the country was one of the hottest emerging markets despite its political turmoil. This is the fourth or fifth major private equity fund focusing on Pakistan. JS Group, a Pakistani financial services group, is the sponsor and a large investor in this new JS Private Equity Fund, which was closed on Dec. 31 at $158 million.

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Friday, January 25, 2008

New Private Equity Fund Targets Pakistan

A private-equity fund solely dedicated to investing in Pakistan was closed December,2007,capping a year in which the country was one of the hottest emerging markets despite its political turmoil.
JS Group, a Pakistani financial services group, is the sponsor and a large investor in the new JS Private Equity Fund, which was closed on Dec. 31 at $158 million.
The fund, launched in 2006, is likely the third or fourth private-equity fund to invest solely in Pakistan. There are also several regional funds with a mandate to invest in Pakistan. Compared with neighboring India, however, Pakistan has a virtually virgin private-equity market.
In Karachi, the benchmark KSE-100 stock index rallied 47% in 2007 through Dec. 27, making it one of the best-performing emerging markets and nearly matching the gains of India's Sensex index. In comparison, Indonesian shares gained 52% and Brazil 40% in 2007.
"I could understand why a lot of foreign investors are a little spooked by what is happening in Pakistan," said Stephen Smith, partner at JS Private Equity. "Those less experienced in emerging markets will become very nervous."
After Bhutto's killing, the stock exchange was closed for several days and when it reopened on Dec. 31, the market tumbled 4.5%. Subsequently, however, the market has slowly pared its losses. The KSE-100 index is virtually unchanged on the year as of late Thursday.
Smith, however, believes that the political premium is likely overstated and that Pakistan's economic growth and unpenetrated private-equity market offer big opportunities for investors willing to take the risk.
Pakistan has a population of $160 million and its GDP growth has averaged 7% over the past five years. According to a recent United Nations report, Pakistan's GDP is expected to grow 6.2% or more in 2008.
Pakistan is one of the so-called "Next 11" countries singled out by Goldman Sachs as having the potential to offer tremendous investment opportunities, akin to those of leading emerging markets.
"The real thrust of the fund is to provide expansion capital to businesses that are domestic-demand driven," Smith said. "Things have really changed in Pakistan over the last five years. You have the emergence of a fledgling middle class."
The fund sees opportunities in both export-related industries, such as textiles, leather and medical supplies, as well as domestic-demand related industries, such as consumer goods, media and advertising. Smith also sees opportunities in inefficiencies in infrastructure, transportation and logistics, as well as agriculture and horticulture.
"[About] 25% of its economy is agricultural and horticultural and yet the amount of wastage of those products is extraordinarily high, because the infrastructure points are not very efficient," Smith said.
The JS Private Equity Fund has already made two investments. The first is a control investment in Optimus, the Hertz franchise in Pakistan, which specializes in long-term vehicle contract-leasing to businesses. The second is a minority investment in Engro Asahi Polymer & Chemicals, the only Pakistani producer of PVC resin.
Focus on institutional investors
JS Group has been doing private-equity style deals in Pakistan for a long time, but it was only in 2006 that it decided to create a formal fund, targeting professional institutional investors.
With a $40-million investment, CDC Group, a British government-owned fund of funds that invests in emerging markets, is the largest investor in the JS fund. Other investors include the International Finance Corporation; Samba, one of Saudi Arabia's leading financial groups; the Asian Development Bank; the Swiss Investment Fund for Emerging Markets; and PROPARCO, a subsidiary of the French Development Agency dedicated to financing the private sector.
"We're essentially betting on the long term, putting aside short-term volatility. Long-term the economy will win," said Brian Lim, portfolio director at CDC Group.
"We're essentially betting on the long term, putting aside short-term volatility. Long-term the economy will win."
— Brian Lim, CDC Group
"What we did look at was the history of the economy over successive generations of rulers," Lim said. "There did seem to be an economic will for liberalization, for FDI [foreign direct investment]. The one certainty is the economy has worked very well over the recent past. We're hopeful that things will resolve themselves on the political front."
Another reason to enter the Pakistani market is that there is very little competition among private-equity players, Lim said.
"In many sectors there were companies that could grow even faster, but the capital wasn't there," he said.
While neighboring India is experiencing a private-equity boom, Pakistan remains largely overlooked by the industry. There are only a handful of other private-equity funds solely dedicated to Pakistan. Among them are the $100-million TMT-SEAF Pakistan Growth Fund and the $300-million Abraaj BMA Pakistan Buyout Fund L.P. Several regional funds also have a mandate to invest in Pakistan.
In comparison, there are approximately 110 to 120 funds focused primarily on India, according to estimates from the Emerging Markets Private Equity Association.
That estimate looks conservative compared with that of Evalueserve, a global research and analytics firm, which estimates that approximately 200 funds are actively investing or fundraising in India.
"It's a very, very different market from India and China," Smith said. "We like to think we're helping to develop the market. We're a long away from what I'd call a competitive market for private equity. It means that we have to do a lot of patient education."

Source: MarketWatch, January, 2008

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Atiq Raza Pays $3m Fine, Settles Insider Trading Charges

Saiyed Atiq Raza, prominent Silicon Valley Pakistani-American and venture investor, agreed to pay $3m in fine to settle SEC charges of insider trading, according to the US Securities and Exchange Commission.
The charges against Saiyed Atiq Raza, 58 years old, a former president and chief operating officer of chip maker Advanced Micro Devices Inc., stemmed from trades he made in 2006 while serving as a director of San Francisco orthodontic device maker OrthoClear Holdings Inc. Under the terms of the agreement, Mr. Raza was also barred from serving as an officer or director of a public company for five years, and he was permanently enjoined from future violations of the federal securities laws.
The SEC alleged that Mr. Raza in September 2006 was informed by OrthoClear's chief executive Zia Chishti that the company had agreed to cease competing with rival Align Technology Inc., of Santa Clara, Calif. The agreement, which effectively put OrthoClear out of business, followed a long-running intellectual-property rights dispute between the transparent teeth-aligner market competitors.
According to the SEC, Mr. Raza within two days of learning about the settlement began making large purchases of Align call options -- which would increase in value if the company's share price rose -- before the litigation settlement agreement became public. When the OrthoClear settlement was publicly announced several days later, the price of Align stock shot up 48% and Mr. Raza netted a profit of $1,450,900, the SEC said.
Zia Chishti is a Pakistani-American founder of both Align and OrthoClear. Zia is also the founder of The Resource Group, a company with call centers in Pakistan serving clients in the United States.

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Thursday, January 24, 2008

Musharraf Promotes Pakistani Economy at Davos, Switzerland

"Judge economic performance, the welfare of people and political stability," President Musharraf told business and political leaders at the World Economic Forum in Switzerland.
"Please don't judge (us) on maybe unrealistic Western perceptions of democracy and human rights." According to Reuters, he went on say, "The elections must be free, fair and transparent. And I've added another word -- peaceful, we will make sure that they are peaceful."
President Musharraf, Bangladeshi Prime Minister Fakhruddin Ahmed, Iraq's Deputy Prime Minister Barham Salih and Afghanistan's President Hamid Karzai together appeared at a panel discussion in Davos Thursday to discuss 'The Quest for Peace and Stability.'
Earlier, Mr. Musharraf met with US Secretary of State Condoleeza Rice on the sidelines at Davos. After this meeting, Rice praised him as a steadfast ally in the war on terror whose country would continue to receive substantial U.S. support. But she stressed that he must uphold his stated commitment to democracy. Musharraf's meeting with Rice was part of a European tour aimed at reassuring Western leaders about his ability to restore democracy and prevail in the escalating combat between government troops and Taliban rebels along Pakistan's mountainous border with Afghanistan.

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Wednesday, January 23, 2008

Musharraf Woos EU Investors

The European Union is Pakistan's largest trading partner, with annual trade worth $9bn. With this backdrop, it makes sense for President Musharraf to visit Europe on what is described by some as a "charm offensive".
In spite of all the turmoil and recent bad news, Pakistani economy continues to be the bright spot often ignored by the media. This European visit is intended to get attention to Pakistan's economic performance and to attract European investment to help keep the economy on track for continued growth of 7-8% per year. In addition to meeting the political leadership in Europe, Mr. Musharraf has talked with the media and the business and investor community to reassure of them of progress on various fronts, including the restoration of democracy, the war on terror, and economic growth.
On the political front, he reassured them the elections would be held on the scheduled date and would usher political stability in the country. He further said that nobody would be allowed to create chaos and agitation in the country before or after the polls, reports APP, a Pakistani news agency.
Mr. Musharraf highlighted the economic achievements of the country during the past seven years and said Pakistan succeeded in sustaining economic growth of up to 7 percent and further improving the economic indicators like increasing the per capita income, foreign reserves and stock exchange index position. He said there has been an industrial boom in Pakistan in recent years, which was also a factor behind shortage of energy.
Replying to a question, the President allayed concerns and mis-perceptions among business executives about the law and order and political situation in Pakistan. He assured them that they will find best possible opportunities and a win-win situation in the country to make economic gains.
Mr Musharraf is expected to meet Nicolas Sarkozy, France’s president, and Gordon Brown, the UK prime minister, as well as to attend the World Economic Forum in Davos.

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Tuesday, January 22, 2008

Karachi Stocks Hold Up Well As World Markets Plunge

As the world stock markets plunged dramatically on fears of US recession dragging down the world economy, the stock prices in Karachi did well on Tue, the 22nd of January, 2008. While shares on Mumbai, Shanghai, Tokyo and other world stock markets lost 5% or more of their value, the KSE-100 lost only 24 points to close at 13,850 points and KSE-30 gained 18 points closing at 16,505. This remarkable resilience at KSE is a testament to the investor confidence that Pakistani economy has great potential offering very good companies at significant discount to valuations of similar companies elsewhere. Various analysts estimate that, in spite of 40 percent increase in 2007, Pakistani shares still sell for about half the P/E ratios of shares in India and China.

Following the decision by the US Federal Reserve to cut interest rate by an unexpected 0.75%, it is likely that the world markets will stabilize shortly. However, the Asian markets have become extremely expensive with Pakistan's KSE being one of the few exceptions. This is likely to spur greater international investment in Karachi. The one wild card that remains in the immediate future is the Pakistani elections in February and what happens in its aftermath. If President Musharraf handles it well, both the KSE and the Pakistani economy will be the beneficiaries. Beyond that, if some semblance of stability continues, it would only be an additional bonus driving up the economy and the stock prices higher, bringing new jobs, expanding the size of the middle class with its spending power, and improving the living standards for all Pakistanis.

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Monday, January 21, 2008

Pakistan's Telecom Boom Continues

Telecom sector is attracting the largest share of foreign direct investment in Pakistan. Foreign investors pumped in $364m into it during July-Sept 2007 quarter, according to the latest figures released by Pakistan Telecommunications Authority. The total FDI in Pakistan for this 3-month period was $962.5m.
The number of cellular subscribers in Pakistan has crossed 76m in Dec, 2007, from 500,000 in 2004. According to Business Recorder, Pakistan's financial daily, most forecasters believe that the upward trend will continue in the next 5 years because of the huge market potential, particularly in the rural areas where the build-out has yet to happen. Opreators such as Wateen (with Motorola) are planning a large Wimax roll-out to improve voice and high bandwidth data access across the country. The biggest mobile operators in Pakistan include Mobilink with 30m subscribers, Ufone with 16m, Telenor with 14m, Warid with 13m and Paktel with 1m.
It must be noted that FDI is different from stock market investments. FDI money goes to build factories, infrastructure and facilities rather than the purchase of financial assets such as stocks and bonds by mutual funds.
According to Pakistan's Daily Times, Pakistan’ telecom boom has created more than 300,000 jobs in the telecom sector. This has resulted in huge demand for professional and capable telecom workforce that can expertly meet the new age requirements of these positions. Creative public private partnerships are being established to meet this demand.

Thanks to Pakistanis' rising incomes, which have more than doubled to over US$900 per year in the last seven years, and increased competition, the teledensity rate is expected to go over 50 percent in the next couple of years, according to officials and analysts. Opportunities such as these are fueling the continuing growth in the middle class which further enhances the ongoing consumer boom. By various estimates, the Pakistani middle class has now grown to over 30m people, about 20% of the total population. The size of this middle class makes Pakistan an attractive opportunity for investors, in spite of the continuing political uncertainty with the approaching elections in February, 2008. Analysts such as Merrill Lynch's Chief Market strategist Mark Matthews are very bullish on Pakistan. Matthews has called Pakistan a "safe haven" for investors as recently as Jan 6, 2008 in an interview with CNBC.

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Thursday, January 17, 2008

Remittances From Pakistanis Up 20%

Overseas Pakistanis sent home over $3B during July-December 2007 period. This is up 19.4% over the same period last year, according to a report in Business Recorder, Pakistan's financial daily newspaper. The biggest inflows came from the US with $874m followed by Saudi Arabia with $563m, UAE with $500m, GCC countries with $457m, UK with $227m and EU with $89m. The remittances to Pakistan are rising at twice the overall rate of remittances from developed to developing countries.
These remittances also compare favorably with the foreign direct investment of $1.87B in Pakistan in the first half of 2007 which increased by 67% over the same period in 2006.
In addition to these inflows, Pakistan earns about $18B a year through exports and receives another $750m annually in US aid.
While good economic policies by Pakistani government have inspired confidence among investors and the business community, these additional inflows have clearly helped in achieving about 7% annual growth with rising incomes and the growing middle class clout in Pakistan.
The indications are that the economic growth will continue in spite the current political turmoil in the foreseeable future.

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Wednesday, January 16, 2008

Merrill Chief Strategist Says Pakistan A Safe Haven For Investors

"Pakistan is a safe haven for investors", says Mark Matthews, chief Asia strategist at Merrill Lynch, speaking to CNBC's Arnold Gay in January, 2008. This is in sharp contrast to some of the rating agencies like S&P and Moody's hinting at possible downgrade of Pakistan as an investment opportunity. Matthews argues that Pakistan is one of the best information arbitrage markets in the world.
While the bombings, shootings and the body bags make good headlines for the news media, Matthews says it is incorrect to say that Pakistan is being radicalized. There is always a radical fringe in Pakistan like many other countries. Matthews is "very bullish on Pakistan". He points out that Karachi Stock Exchange KSE-100 index rose 45% and Pakistan's GDP grew by 7% in 2007 in spite of continuing political instability and a continuous stream of news of violence and mayhem on the streets. Pakistan has some of the best companies in the world with stock valuations about half of similar companies in India.
Here's a link to the CNBC video of Matthews' interview.

Here are more views about investing in Pakistan:

Mark Mathews:
Bhutto's death is "on the whole, largely irrelevant to the economy, which like other places, is what really moves the stock market," Merrill's Mark Matthews, who's based in Hong Kong, said in an interview Wednesday.
The strategist recommends investors hold more Pakistani shares than their representations on key regional stock benchmarks. The country's government expects the economy to expand 7.2 percent in the business year ending June, accelerating from 7 percent in the previous 12 months.
The country's shares on average trade on 10 times reported earnings with a dividend yield of 6 percent, Matthews said, citing Merrill Lynch data. That's compared with "consensus" valuations for Vietnamese stocks of 20 times, he said.

Roger Groebli:
"I'm afraid that the instability in the region will dampen investor appetite," said Roger Groebli, head of Asian equity research at ABN Amro Private Banking in Singapore.

Mark Jolley:
"On a longer-term view, I'm pretty bullish on Pakistan," said Mark Jolley, Deutsche Bank's Hong Kong-based Asian equity strategist. "Whatever the outcome, the reform agenda looks like it's going to remain intact."

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Tuesday, January 15, 2008

India And Pakistan: 60 Years After Independence

Amid all the hoopla surrounding the 60th anniversary of Indian independence, almost nothing has been heard from Pakistan, which turns 60 today. Nothing, that is, if you discount the low rumble of suicide bombings, the noise of automatic weapons storming the Red Mosque and the creak of slowly collapsing dictatorships.

In the world's media, never has the contrast between the two countries appeared so stark: one is widely perceived as the next great superpower; the other written off as a failed state, a world center of Islamic radicalism, the hiding place of Osama bin Laden and the only US ally that Washington appears ready to bomb.

On the ground, of course, the reality is different and first-time visitors to Pakistan are almost always surprised by the country's visible prosperity. There is far less poverty on show in Pakistan than in India, fewer beggars, and much less desperation. In many ways the infrastructure of Pakistan is much more advanced: there are better roads and airports, and more reliable electricity. Middle-class Pakistani houses are often bigger and better appointed than their equivalents in India.

Moreover, the Pakistani economy is undergoing a construction and consumer boom similar to India's, with growth rates of 7%, and what is currently the fastest-rising stock market in Asia. You can see the effects everywhere: in new shopping centres and restaurant complexes, in the hoardings for the latest laptops and iPods, in the cranes and building sites, in the endless stores selling mobile phones: in 2003 the country had fewer than three million cellphone users; today there are almost 50 million.

Mohsin Hamid, author of the Booker long-listed novel The Reluctant Fundamentalist, wrote about this change after a recent visit: having lived abroad as a banker in New York and London, he returned home to find the country unrecognisable. He was particularly struck by "the incredible new world of media that had sprung up, a world of music videos, fashion programmes, independent news networks, cross-dressing talkshow hosts, religious debates, and stock-market analysis".

I knew, of course, that the government of Pervez Musharraf had opened the media to private operators. But I had not until then realised how profoundly things had changed. Not just television, but private radio stations and newspapers have also flourished in Pakistan over the past few years. The result is an unprecedented openness. Young people are speaking and dressing differently. Views both critical and supportive of the government are voiced with breathtaking frankness in an atmosphere remarkably lacking in censorship. Public space, the common area for culture and expression that had been so circumscribed in my childhood, has now been vastly expanded. The Vagina Monologues was recently performed on stage to standing ovations.

Little of this is reported in the western press, which prefers its sterotypes simple: India-successful; Pakistan-failure. Nevertheless, despite the economic boom, there are three serious problems that Pakistan will have to sort out if it is to continue to keep up with its giant neighbour - or indeed continue as a coherent state at all.

One is the fundamental flaw in Pakistan's political system. Democracy has never thrived here, at least in part because landowning remains almost the only social base from which politicians can emerge. In general, the educated middle class - which in India seized control in 1947, emasculating the power of its landowners - is in Pakistan still largely excluded from the political process. As a result, in many of the more backward parts of Pakistan the local feudal zamindar can expect his people to vote for his chosen candidate. Such loyalty can be enforced. Many of the biggest zamindars have private prisons and most have private armies.

In such an environment, politicians tend to come to power more through deals done within Pakistan's small elite than through the will of the people. Behind Pakistan's swings between military governments and democracy lies a surprising continuity of interests: to some extent, the industrial, military, landowning and bureaucratic elites are now all related and look after one another. The current rumours of secret negotiations going on between Musharraf and Benazir Bhutto, the exiled former prime minister, are typical of the way that the civil and military elites have shared power with relatively little recourse to the electorate.

The second major problem that the country faces is linked with the absence of real democracy, and that is the many burgeoning jihadi and Islamist groups. For 25 years, the military and Pakistan's powerful Inter-Services Intelligence (ISI), have been the paymasters of myriad mujahideen groups. These were intended for selective deployment first in Afghanistan and then Kashmir, where they were intended to fight proxy wars for the army, at low cost and low risk. Twenty-eight years after the Soviet invasion of Afghanistan, however, the results have been disastrous, filling the country with thousands of armed but now largely unemployed jihadis, millions of modern weapons, and a proliferation of militant groups.

While the military and intelligence community in Pakistan may have once believed that it could use jihadis for its own ends, the Islamists have followed their own agendas. As the recent upheavals in Islamabad have dramatically shown, they have now brought their struggle on to the streets and into the heart of the country's politics.

The third major issue facing the country is its desperate education crisis. No problem in Pakistan casts such a long shadow over its future as the abject failure of the government to educate more than a fraction of its own people: at the moment, a mere 1.8% of Pakistan's GDP is spent on government schools. The statistics are dire: 15% of these government schools are without a proper building; 52% without a boundary wall; 71% without electricity.

This was graphically confirmed by a survey conducted two years ago by the former Pakistan cricket captain turned politician, Imran Khan, in his own constituency of Mianwali. His research showed that 20% of government schools supposed to be functioning in his constituency did not exist at all, a quarter had no teachers and 70% were closed. No school had more than half of the teachers it was meant to have. Of those that were just about functioning, many had children of all grades crammed into a single room, often sitting on the floor in the absence of desks.

This education gap is the most striking way in which Pakistan is lagging behind India: in India, 65% of the population is literate and the number rises every year: only last year, the Indian education system received a substantial boost of state funds.

But in Pakistan, the literacy figure is under half (it is currently 49%) and falling: instead of investing in education, Musharraf's military government is spending money on a cripplingly expensive fleet of American F-16s for its air force. As a result, out of 162 million Pakistanis, 83 million adults of 15 years and above are illiterate. Among women the problem is worse still: 65% of all female adults are illiterate. As the population rockets, the problem gets worse.

The virtual collapse of government schooling has meant that many of the country's poorest people have no option but to place their children in the madrasa system, where they are guaranteed an ultra-conservative but free education, often subsidised by religious endowments provided by the Wahhabi Saudis.

Altogether there are now an estimated 800,000 to one million students enrolled in Pakistan's madrasas. Though the link between the madrasas and al-Qaida is often exaggerated, it is true that madrasa students have been closely involved in the rise of the Taliban and the growth of sectarian violence; it is also true that the education provided by many madrasas is often wholly inadequate to equip children for modern life in a civil society.

Sixty years after its birth, India faces a number of serious problems - not least the growing gap between rich and poor, the criminalization of politics, and the flourishing Maoist and Naxalite groups that have recently proliferated in the east of the country. But Pakistan's problems are on a different scale; indeed, the country finds itself at a crossroads. As Jugnu Mohsin, the publisher of the Lahore-based Friday Times, put it recently, "After a period of relative quiet, for the first time in a decade, we are back to the old question: it is not just whether Pakistan, but will Pakistan survive?" On the country's 60th birthday, the answer is by no means clear.

Courtesy: William Dalrymple, The Guardian Newspaper, UK. First Published Aug 14, 2007

· William Dalrymple's new book, The Last Mughal: The Fall of a Dynasty, Delhi 1857, published by Bloomsbury, has just been awarded the Duff Cooper prize for history.

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International Investment Outlook For Pakistan

The political instability has further increased foreign investors’ perceived risk in Pakistan, even as many held back on spending plans as they awaited the outcome of parliamentary elections originally scheduled for January 8 and now postponed following the assassination. A range of concerns already included security and law and order worries, even as the country's economy was growing at a fast pace over the past five years under President Musharraf's liberal economic policies.

Foreign direct investment (FDI) has increased to $3.8 billion from a mere $500 million and according to Pakistan’s central bank rose 67% to $1.87 billion in the first half of the 2006-07 fiscal year, led by inflows into the communications, energy, and banking and financial services sectors. During the period, the banking and financial services sector attracted foreign investment of $517 million, followed by the communications sector with $495 million and oil and gas exploration with $315 million.

The strength of economic growth - the government forecasts growth of 7.2% in the year ended June 2008, compared with 7% a year earlier - has outweighed for foreign investors the political risks in the country. The benchmark Karachi Stock Exchange 100 Index has gained for six straight years with a 40% increase in 2007. It was trading at around the 13,590.70 mark on January 2, down from more than 14,814 before the assassination.

Officials claim foreign money has flowed into the country attracted by the availability of skilled manpower and low production costs of production and a level-playing field for both foreign and local investors. Liquid foreign exchange reserves have risen to $22.3 million during the week ended December 22. Total liquid foreign exchange reserves stood at over US$15.6 billion, according to the central bank.

Standard & Poor’s Ratings Services rates Pakistan's sovereign foreign currency B+ with a negative outlook, four notches below investment grade, the same level as Moody’s Investors Service rating of B1 with a negative outlook.

Moody's believes the country's credit rating may hold steady if the country’s economic policy framework does not change, while John Chambers, chairman of S&P’s sovereign rating committee, argues that the sovereign foreign currency will be lowered if the assassination ushers in a period of heightened political instability.

Foreign direct investment and portfolio flows are likely to decline, negatively affecting Pakistan’s external liquidity position, given its large current account deficit of about 4.8% of gross domestic product. The country may encounter increasing difficulty in refinancing its external and domestic debt if lenders’ risk aversion toward Pakistan increases. In addition, fiscal slippages may arise, pushing deficits beyond the government’s target of 4% of GDP, jeopardizing the currently favorable debt trajectory.

Luis Costa, the head of emerging debt at Commerzbank in London, said: "This is the worst possible scenario for foreign investment. In the first half of 2007, we saw Pakistani assets outperforming, which brought in real money managers. We will probably now see a reversal of this trend."

Bhutto’s assassination and concern over increased violence in a country that is a key US ally in its ''war on terror'', combined with weak US economic data, unsettled international markets, which fell on the day following the murder. According to some analysts, the killing and the possibility of a civil war breaking out in the country could raise geopolitical tensions, sustaining the rise in oil prices, which could go above $100 per barrel. US military and defence officials however believe that Pakistan's nuclear weapons remain securely under the control of the Pakistani military.

Source: Asia Times Online

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Wheat Crisis in Pakistan

Rising Atta Prices
The rising prices and acute shortages of atta (wheat flour), a staple in Pakistan, are clearly distressing to the people. However, putting it in perspective, this wheat crisis is not isolated to Pakistan. There are widespread fears of food shortages and lack of affordability in
many countries around the world.

According to a recent report in Wall Street Journal, the prices of Illinois corn and soybeans rose 40% and 75%, respectively, from a year ago. Kansas wheat is up 70% or more. And a growing number of economists and agribusiness executives think the run-ups could last as long as a decade, raising the cost of all kinds of food.

World Wheat Stock At 26-Year Low
Global Demand is leaving end-of-year grain inventories at levels that are less than 20% of the total amount used each year; a graph of stocks as a percentage of use is as follows:

Source: US Dept of Agriculture

No More Cheap Grain
"The days of cheap grain are gone," says Dan Basse, president of AgResource Co., a Chicago commodity forecasting concern.

Rising prices and surging demand for the crops that supply half of the world's calories are producing the biggest changes in global food markets in 30 years, altering the economic landscape for everyone from consumers and farmers to corporate giants and the world's poor. The biggest increases in demand are the result of rising incomes in the developing nations where a large number of people have moved up into the middle class. Meanwhile production has failed to keep up with the rising demand. In Canada, for example, Statistics Canada trimmed its spring wheat production estimate to 509.8 million bushels, down from its October forecast of 526 million. In 2006, Canada produced 684 million bushels of spring wheat. Canada produced less
spring wheat this year than in 2006 due to reduced plantings and unfavorably hot conditions during the growing season.

USDA Report on Pakistan Wheat Crisis
According to a US Dept of Agriculture Report in December 2007, Prime Minister Shaukat Aziz announced in Sept, 2007 that the GOP would import one million tons of wheat, stating that this action was necessary to “maintain a reasonable buffer stock for the future.” The export price for Pakistani wheat during the April-May export window was approximately $225-232 per ton. For December 2007 delivery, Pakistan is now
looking at an estimated import price of $380-400 per ton, exclusive of transportation. The timing couldn’t be worse. World wheat stocks are at a 26-year low, mainly due to severe weather conditions in the major production areas of Canada, Australia, the EU and Ukraine. Consequently, wheat prices have hit all-time record highs.
The Government of Pakistan subsequently decided to make smaller wheat purchases, rather than a single 1 million ton purchase. Pakistani officials cited overbooking at the Port of Karachi and the problems berthing larger vessels as well as the need for a monthly review of the wheat situation as reasons for moving away from a single tender. They have also hinted that they may lift the ban on private imports. The Government of Pakistan could provide a subsidy for the imported wheat to cover the differential between the government issue price and the import price.
Clearly, Pakistan witnessed a perfect storm scenario on wheat in 2007 with an overly optimistic wheat crop estimate, a well-intentioned decision to lift the four-year wheat export ban to raise farm prices, severe weather conditions in the major world wheat production areas, and increased demand during Ramadan. In hindsight, lowering the official crop estimate should have had the same effect on farm prices as exports, while keeping more wheat within Pakistan. This report clearly spells out some of the mis-steps by Pakistani Government leading up to the current crisis.

Food Subsidies
Many developing nations, such as Pakistan, control and subsidize food prices by procuring the harvest from farmers at a fixed price and by providing subsidies to keep the retail prices low. The world market price for raw wheat comes to about Pak Rs. 24 per kilo in large quantity purchases excluding the cost of transportation, milling and bagging. Pakistan Government has set the retail price of atta(wheat flour) at Rs.16 per kilo. Large differentials in prices and availability across national borders encourage smuggling for profiteering. Add to this the endemic corruption in many developing nations, and you have all the ingredients for a serious food shortage. Measures such as the use of the military to guard grain storage and milling and distribution centers can help temporarily. But these are just band-aids.

The Future
There is no obvious long term solution, other than systematically increasing production, building state wheat reserves (instead of wheat exports), and by providing special assistance to the low-income people. I hope I am wrong but there is clearly a possibility of atta riots in Pakistan to add to the already precarious security situation. The politicians opposed to Musharraf would be all too happy to take advantage of this situation, as the media play up the shortages to stoke widespread public anger.

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Is Demand in South Asia Driving Up Gold?

Human civilization's fascination with gold goes as far back as the Sumerians of Mesopotamia (Modern day Iran and Iraq) where gold was first discovered in the third millennium B.C. While the reasons for accumulating gold have been changing over time, the fascination continues unabated. The gold price is surging again. This week it set a new record of about $890 per troy ounce, well ahead of the previous all-time record of $850 an ounce set in 1980. A troy ounce is about 31.1 grams and a tola is 11.7 grams. Some analysts argue that, even at the nominal price of $890 an ounce today, it remains far below the inflation-adjusted high of about $2200 an ounce, based on the current equivalent of the 1980 dollars.

There are many factors driving the price of gold in recent times. Among others, the slowing sale of gold reserves by the European central banks and the declining production and falling dollar have been the most cited reasons. However, the one factor that I believe is the most significant is the newfound wealth and the surge in gold demand in South Asia, the Middle East and China. According to the World Gold Council figures, the annual demand in India alone is about 800 tonnes, almost all of it for jewelry. The Indians are estimated to own about 40,000 tonnes of gold, about a third of the world's total. Exact figures for Pakistan are hard to find but demand in Pakistan is estimated at 150-160 tonnes per year. The Chinese are using 220 tonnes a year. A tonne is 32,150 ounces. Most forecasts indicate continuing growth in gold demand as Asian growth continues for the foreseeable future.

In addition to the growth in traditional jewelry demand in South Asia and the Middle East, the US dollar erosion and the inflation and recession fears are fueling investor interest in gold and new ways of investing in gold are thriving. Two ETFs called streetTRACKs Gold Trust (NYSE: GLD) and Metal Gold ETF (LON: PHAU) have been very popular vehicles for retail investors. An ETF is an Exchange Traded Fund. It is similar to a Mutual Fund except that it can be traded like regular shares at any time when the markets are open.
GLD currently holds 628 tonnes of gold, just behind Japan central bank.

Many analysts are quite bullish about continuing surge in gold prices. If, however, Central Banks decide to start selling significant amounts of gold again, gold price could drop. US Federal Reserve alone holds about 8,500 tonnes of gold followed by Germany with 3,400 tonnes. The last crash of the gold price in 1990s was caused by large gold sales by the Bank of England and other European central banks.

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