Monday, March 31, 2008

Gillani Dealing With Wheat and Energy Crises

With global commodity prices and inflation hitting new highs, Pakistan and other emerging economies are faced with serious challenges. The rising inflation of staples such as wheat has already claimed Pakistan's former ruling coalition as a victim. Many other developing countries' governments are likely to fall as well unless these challenges are addressed effectively.

Knowing the importance of wheat for Pakistanis, the government of Prime Minister Syed Yousaf Raza Gillani has begun to take steps to alleviate the wheat crisis. The first steps, announced yesterday by Ministry of Food and Agriculture, deal with providing incentives to farmers to grow more wheat. The price of 40Kg of wheat has been raised by more than 20 percent to Rs. 625.00 (US$9.90) from Rs 510.00 (US$7.90). The government plans to build a 5-million-tonne strategic reserve from the 2007/08 crop, but farmers had rejected the procurement price of 510 rupees per 40 kg as below domestic and international market levels. In addition to price support, the government has announced support for agriculture equipment purchases with the first batch of 50 bulldozers (out of total 300) arriving from China in July this year. These would be put on trial for two months in difficult terrain of NWFP and Balochistan to increase wheat production.

Pakistan saw a surge in wheat and flour prices in the domestic market after a shortage in September and had to import nearly 1.6 million tonnes in spite of producing 23.3 million tonnes of wheat in the 2006/07 crop year.

The south Asian country of 160 million people consumes about 22 million tonnes of wheat a year, according to Reuters.

For the financial year 2007/08, the government has fixed a wheat output target of 24 million tonnes, but farmers and food ministry officials say that target is impossible to achieve and estimate output will be 21 million to 22 million tonnes.

Industry officials say lower-than-expected output may force the government to import between 1 million and 2 million tonnes for stocks and domestic needs.

In addition to the wheat crisis, the other major crisis angering Pakistanis is the continuing brown-outs resulting from 2500-3000MW electricity shortage. Prime Minister Yousuf Raza Gilani is all set to ink the first-ever power sector pact of his government with a Chinese company, Dong Fong, today for setting up 525 MW thermal power plant with an investment of $450 million at Chichoki Mallian (Sheikhupura), sources close to the Private Power Infrastructure Board (PPIB) managing director told Business Recorder, Pakistan's Financial Daily Newspaper.

Business Recorder is reporting that its sources have expressed serious concern over the cost escalation, saying lower project cost could have been negotiated by a team of experts. The Dong Fong was already in the process of setting up thermal power plant of 450-500 MW at Nandipur (Gujranwala), though several questions had been raised by the Euro Dynamics International, a Lahore-based firm, that the second lower bidder joint venture of Chinese company does not meet the qualification and requirement of combined cycle plant.

Earlier, former prime minister Shaukat Aziz had signed a memorandum of understanding (MoU) with the Qatar Investment Authority (QIA) and the Alstom-Marubini to set up 450-500 MW thermal power plant at Chichoki Mallian, but a couple of months ago, the pact was terminated when the sponsors did not come up with tariff petition.

Notwithstanding allegations of cost escalation and possible corruption, these are all steps in the right direction by Mr. Gillani's new government. The real question is: Would these steps be sufficient to address the severity of the two crises? Or do we need a more comprehensive plan of action beyond these first steps? A comprehensive, long range plan that addresses the underlying issues of the impact of growing population, increasing global demand and rising inflation that show no signs of abating? Let's wait and see how Mr. Gillani's "first 100" days deliver.

Sunday, March 30, 2008

Karachi: The Heart of Pakistan Economy

The business community in Karachi welcomed the support of the Muttahida Qaumi Movement for the new prime minister Mr. Gillani. Good relations between Pakistan People’s Party and the MQM are considered vital for the business community in Pakistan.

According to Pakistan's Dawn newspaper, Shamim A. Shamsi, president of the Karachi Chamber of Commerce and Industry, urged the new team to revisit economic policy issues and resolve them for the good of the people.

“It was wise of the PPP to take the MQM on board as it is an integral part of the current reality of the province. The decision bodes well for Karachi and therefore the country,” Majyd Aziz, a senior leader of the business community, said.

Peace in Karachi is considered crucial for Pakistan's economic growth and prosperity. According to Wikipedia, Karachi is the financial capital of Pakistan and the biggest port city; it accounts for the lion's share of GDP and revenue. It generates over 65% of the total national revenue (federal and provincial taxes, customs and surcharges. Karachi produces about 42 percent of value added in large scale manufacturing and 25% of the GDP of Pakistan. In February 2007, the World Bank identified Karachi as the most business-friendly city in Pakistan.

Most of Pakistan's public and private banks are headquartered on Karachi's I.I. Chundrigar Road, while most major foreign multinational corporations operating in Pakistan have their headquarters in Karachi. The Karachi Stock Exchange is the largest stock exchange in Pakistan, and is considered by many economists to be one of the prime reasons for Pakistan's 8% GDP growth across 2005. During the 1960s, Karachi was seen as an economic role model around the world, and there was much praise for the way its economy was progressing. Many countries sought to emulate Pakistan's economic planning strategy and one of them, South Korea, copied the city's second "Five-Year Plan" and World Financial Center in Seoul is designed and modeled after Karachi.

In the past, the clashes between the ruling parties and the MQM, Karachi's biggest political force, have resulted in serious economic difficulties in Pakistan. The last several years, however, have seen robust economic growth and a close cooperative relationship between the MQM and the ruling coalition in Islamabad. Any progress toward maintaining a positive relationship between the MQM and the PPP would go a long way in sustaining Pakistan's economy for the benefit of the entire nation.

Wednesday, March 26, 2008

India's Global Shopping Spree

India's Tata Motors Ltd has agreed to acquire Jaguar and Land Rover, the well known international luxury brand names. The price tag of $2.3 billion represents a real bargain at a fraction of what Ford paid to buy these brands a few years ago. The Wall Street Journal reports that the deal, expected to be made final with regulators sometime during the second quarter, capped off months of discussions between the parties and much speculation among investors about the fate of the brands in the sale. The process began last June when the U.S. auto maker hired Goldman Sachs Group and Morgan Stanley to run an auction of the two units, part of its Premier Automotive Group.

While this high-profile deal by an Indian company is making headlines around the world, the data shows that Indian companies have been on a global shopping spree for a several years. The number of Indian companies that are investing abroad has been steadily growing ever since the Tata Group successfully acquired UK's Tetley Tea for $430 million four years ago. According to KPMG, Indian companies shelled out $1.7 billion in the first eight months of 2005 for acquiring 62 overseas companies. While the IT sector, banking and financial services and pharmaceutical companies have been the most active in M&A deals, increasingly other sectors too are getting in on the act. If the small and mid-sized Indian companies too go in for acquisition deals - in the $1 million range - this could give a tremendous boost to India's manufacturing sector, D.V. Venkatagiri wrote in late 2005.

The acquisition binge further intensified with Tata Steel's $13.6 billion takeover in 2007 of Corus, the British steel company. The Aditya Birla group made a $6 billion bid to buy Novelis, a Canadian aluminum company, and Suzlon, a wind-power company, offered $1.6 billion for REpower, a German turbine maker. Ranbaxy, one of India's top pharmaceutical companies, which has spent $500 million acquiring 14 companies abroad since 2004, joined the bidding for the generics business of Merck, a German pharmaceutical company, at about $5 billion. Then Reliance Industries, one of India's two largest groups, was reportedly in talks with three U.S. companies - Dow Chemical, Chevron and GE and two European retailers, Carrefour and Sainsbury, about possible deals. There has been so much foreign acquisition talk by Indian companies it seemed as if herd instinct had replaced financial caution, reports Forbes magazine.

Both Tata and Birla are cushioned by substantial internal cash reserves that will enable them to cover debt taken on with the acquisitions, says Nimesh Kampani, chairman and managing director of JM Financial, a leading Indian investment bank. Kampani says companies that aren't part of large diversified groups, such as Ranbaxy or Suzlon, "have to be much more careful in foreign acquisitions."

Still, the pressure on these and other Indian companies to go global will continue. In 2007, 34 foreign acquisitions totaling $10.4 billion were reported by Indian companies as completed or pending, according to Dealogic, a British research firm. That is almost half of the $23.1 billion total for all of last year.

Indian companies have two targets abroad: businesses that enable them to grow beyond India and become globally competitive, and those that add value in terms of markets, brands, technology or raw materials. In the first category, globalization is forcing companies to choose what to do because they could be vulnerable to foreign takeover bids in a market downturn.

"Scale is a key competitive weapon," says Rajeev Gupta, Indian managing director of Carlyle, a U.S. private-equity firm. "You have to have scale working for you, and that will lead some companies to sell and some to buy. All the top family companies are clear that they have to make choices."

Sources: Wall Street Journal, Forbes, ICFDC (India)

Wednesday, March 19, 2008

Karachi's Stock Exchange Defies Pessimists

Volatile Pakistan does not, at first glance, seem to be attractive for those looking to invest money in a stock market. But the Karachi exchange has gained a reputation as one of the world's top performers. In recent weeks it has again been setting new highs for share prices. VOA Correspondent Steve Herman in Karachi visited the exchange which has been defying the global trend and the direction of Pakistan's economy.

Most investors who follow the U.S. Dow Jones index, Japan's Nikkei or London's FTSE ("Footsie), likely pay little heed to the KSE 100. But those select issues on the Karachi Stock Exchange have been consistently outperforming those of the better-known bourses.

There are 200 member seats on the floor of the Karachi exchange, Pakistan's oldest and biggest stock market. Traders execute orders on computers terminals below a huge electronic board that would not be out of place on Wall Street.

The Karachi market has 650 listed companies with market capitalization totaling $70 billion. From an index below the 2,000 mark seven years ago, Karachi now hovers above the 15,000 level. After a plunge in reaction to former Pakistani Prime Minister Benazir Bhuto's assassination at the end of last year, the key index has since gained nine percent.

While political confusion, suicide bombers and economic woes dominate the front pages, the business sections of newspapers continue to report about the benchmark KSE 100 setting new record highs.

BMA Capital equity sales vice president Nayab Fakhir Qazi explains that is because the price-to-earnings ratios of stocks on the Karachi exchange are a bargain.

"It's trading at very low multiples compared to India or China or other Asian countries. It's significantly attractive. We're seeing a multiple of 11.8 times for '08 earnings and less than 10 times on '09 earnings," said Qazi. "If you compare it to the regional PE's that's a discount of more than 25 percent."

For some, Pakistan may still be too risky when looking at the country's economic data. After all, inflation is rising and the current account deficit is burgeoning. Exports have stagnated.

Senior research analyst Khurran Schehzad at Invest Capital and Securities says many investors, however, prefer to look at the bright side.

"Profit, opportunities are immense here in Pakistan," said Schehzad. "So they are capitalizing on that, but gradually, as politics and society get settled."

And things are far from settled. A new, democratically-elected national assembly sitting for the first time (this week) could find itself fighting for control of the country with the unpopular President and former Army General Pervez Musharraf. Pakistan, after all, has a checkered history of civilian governments being pushed aside by military coupes.

The potential volatility makes betting on the Karachi exchange attractive to the most daring of international investors - those who run hedge funds.

Such funds seek significant short-term gains in the double digits but will typically make a quick exit if shares drop by ten percent or more.

BMA Capital's Qazi says speculators are not the only foreigners trading on Karachi's stock exchange.

"Well it's not only the hedge funds which are investing," she said. "We've seen a lot of foreign investment coming in to the banking sector, telecom sector, energy sector."

This is taking place at a time when overall net foreign investment in Pakistan is falling sharply - off one-third in the first half of this fiscal year.

On the floor of the Karachi stock exchange, one of its trading members, Muhammad Siddique Suleman, believes additional foreign investors will be hard to find because of the somber headlines.

"They are very afraid because they treat Pakistan as an extremist country, a terrorist country," he said. "There are also the suicide bombings going on. Therefore, in my opinion, they will be afraid to come."

But in another example of turning a handicap into an advantage, Qazi at BMA Capital says Pakistan's sluggish export picture means it has less to lose from a downturn in the U.S. economy, compared to other Asian markets, such as China and Japan.

"Only 12.5 percent of our exports go to the U.S. That is going to be positive for Pakistan from the perspective that we are more indigenous," she said. "Our consumption is locally driven."

And Schehzad of Invest Capital points out existing exports are primarily in the agricultural and textiles sector, which are hardly represented in the stock market.

"Oil, banking, cement and fertilizer - these are three or four sectors which constitute most of the volumes, most of the price increase in the market," he said. "From the agriculture sector, very few companies are there.

And that has helped cushion Pakistan's stock markets from the negative impact of record high oil prices.

Some who are critical of the hype surrounding the Karachi exchange contend the market is not all that liquid. Stock exchange member Suleman says the skeptics have a point.

"[It's] quite tightly held. Ninety percent of shares are held by the syndicate sponsors and the institutions. And 10 percent is with the public," he said. "In this 10 percent, four percent are owned by the big players of the stock exchange. Therefore, six percent liquidity is there."

A famous Pakistani economist (Mahbub ul-Haq) noted four decades ago that two-thirds of the country's wealth was in the hands of 20 or so players. But Invest Capital's Schehzad says the playing field has become more level since then.

"Since 2001 onwards the market float has increased, volumes have increased. This reflects that it is not being held by a few people, right? If your float is increasing, the market manipulation reduces," said Schehzad. "This has increased transparency. This has increased the number of hands holding the market. So this can be ruled out."

Now that the key Karachi index has surpassed the 15,000 level, the big question on the trading floor is how high can it go? Many respected analysts contend the robust market has yet to achieve its potential for the year and still could rise another 1,000 or 2,000 points. Such gains would certainly help Karachi keep intact its reputation as home to one of the world's best performing stock markets.

By Steve Herman
17 March 2008
Voice of America News

Rising Migrant Remittances Helping the Developing World

Pakistan reported over 20 per cent growth in remittances from overseas Pakistanis during the first 8 months of fiscal 2007-8. The country ranked number 12 in the world with over $4b in this period. High oil prices and strong economies in the oil-exporting Middle Eastern countries are contributing to strong demand for migrant laborers.

According to a report titled "Remittance Trends 2007" by the World Bank , the flow of remittance globally continues with a robust growth with developing countries taking the lead as major recipients. The growth of remittances to developing countries remains robust because of strong growth in Europe, Middle East and Asia.

Total global remittances in 2007 were estimated by the World Bank to be $318bn of which $240bn went to people in developing countries.

"In many developing countries, remittances provide a life-line for the poor," the World Bank's senior economist Dilip Ratha told the BBC. "They are often an essential source of foreign exchange and a stabilizing force for the economy in turbulent times."

In 2007, Indian workers sent back $27bn (£13.6bn), according to new figures from the World Bank. The other countries in the top five were China with $25.7bn, Mexico's $25bn, the Philippines at $17bn and France with $12.5bn.

The top country from which money was sent was the US with $42bn in recorded outward flows. It was followed by Saudi Arabia, Switzerland and Germany.

Global remittances from migrants are now three times as large as the flows of official government aid to developing countries.

Monday, March 17, 2008

War on Inflation and Energy Shortages: Substitution Strategy

As South Asians suffer greatly from the twin crises of hyper inflation and prolonged, daily power cuts, the life for them is getting more and more difficult every day. The traditional approaches to solve these problems such as increasing governmental subsidies for food and fuel and building more conventional fossil-fuel based generating capacity are not likely to work cost-effectively and sustain ably in the long run. It is time for South Asians to explore creative options to find workable, long-lasting solutions.

Economists often talk about the impact of supply and demand and consumer behavior on inflation. In fact, the consumer price index calculations in the US rely partly on consumers substituting cheaper alternatives for commodities experiencing higher inflation. For example, it is assumed that when the price of steak goes up, consumers start eating chicken instead. The often-criticized substitution process rationalizes this method to eliminate inflation from the US Bureau of Labor Statistics (BLS) basket of goods and services. Indeed, substitution is proof of inflation. When a product's price rises out of consumers' ability to afford purchasing it, its clearly evidence of inflation.

Unfortunately, this assumption of substitution is not always valid, particularly when a staple food or a common form of energy is involved. For example, the people in Pakistan rely on wheat flour for most of their caloric intake. It is possible but not easy to make a substitution, particularly in a very short time-frame unless it is forced upon them due to complete lack of availability or affordability. Similarly, people are used to getting electricity from the grid or using an existing diesel-based emergency generator.

With continuing and dramatic increases in world-wide food and fuel prices, it is clear that heavy subsidies will only bankrupt the emerging nations' governments and prove ineffective in the long run. Instead, it is incumbent upon all governments, including Pakistan and India, to promote substitutions such as potatoes, rice or other sources of starch for wheat. On the energy front, solar power (roof-installed, local and central generation) or wind power should substitute for fossil-fuel generated electricity grid. Recently, Kyocera has announced production of 1.6MW roof-installed solar panels for homes that can easily supply all the needs of a large home, particularly in mostly sunny South Asia. While expensive upfront, such a strategy would alleviate the widespread power shortages and prove more cost-effective in the long run. It will also help reduce environmental pollution and greenhouse gas emissions.

Substitution should be pursued as a strategy to give incentives to both the private sector and the consumers to produce and use alternatives for commodities experiencing the highest inflation rates. In general, each nation needs to diversify its sources of food and energy by encouraging more production and consumption of such alternatives. The governmental incentives can come in the form of tax credits, partial subsidies, and bringing foreign expertise and capital to help set up production of desirable alternatives. With growing populations and world demand, there will continue to be upward pressure on prices of basic commodities. The strategy of developing alternatives, therefore, needs to be a long term and a sustainable strategy.

The substitution strategy can set the stage for a larger effort to grow the economy and improve the living standards without damaging the environment. It can spur innovation and unleash the creativity of the people in South Asia to deal with the real problems of the day while creating opportunities, jobs and wealth and build a stronger society. It can begin to address the serious environmental issues of the day such as global warming that threatens all life on the planet. It can help South Asians avoid making the mistakes the West has made in its drive to industrialize. It can help Indians and Pakistanis do well and do good at the same time.

Saturday, March 15, 2008

Pakistan To Join International Debt Benchmark iTRAXX

Pakistan, along with PTT Aromatics & Refining Pcl, a unit of Thailand's largest energy company, is expected to join Markit's iTraxx Asia ex-Japan Index of credit-default swaps, after demand to trade on the contracts rose, reports Pakistan, whose credit-default swaps have more than doubled since October because of growing political uncertainty and tension between rival parties, is slated to join the benchmark and the 20- member sub-index for non investment-grade governments and companies.

Credit-default swaps are an indicator of the cost of bond insurance that varies with the risk of bond default. Credit default swaps are usually bought by bond holders from credit insurance companies like Ambac, FGIC, and MBIA. These insurers reimburse bondholders in case the bond issuing companies or governments default. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. This is the first time Pakistan is being included in an index of bond default swaps since it got a B+ rating from S&P and started raising capital through borrowing in the international commercial debt market. Prior to this, Pakistan was considered such a high-risk that it could only borrow from IMF, World Bank, Asian Development bank and other similar institutions that lend to the poor nations deemed not credit-worthy. Pakistan did not have access to the commercial credit markets in the 1990s. Pakistan is becoming more active in raising money in global capital markets despite its volatile politics. Last month the country said it was considering issuing a sovereign bond issue, although it has yet to provide further details behind its plan.

It should be noted that the international and the US bond markets have been seriously unsettled recently due to the sub-prime mortgage backed securities crisis. Just yesterday, the Federal Reserve had to bail out Bear Stearns in the United States. Still, the value of Bear Stearns stock dropped by a half in a single day. There are serious concerns about the default of collateralized debt obligations (CDOs) and the ability of the bond insurers such as Ambac to protect the holders of such securities. This has led to a severe credit crunch in which the major banks are unwilling to loan money to each other.

Friday, March 14, 2008

Karachi Stock Market Boom Continues

A Tale of Two Pakistans:

A little more than six years ago, immediately after the Sept. 11 attacks on U.S. cities, few sane investment advisers would have recommended Pakistani stocks.

They should have. Their clients could have made a fortune.

Since 2001, the nuclear-armed South Asian country, blamed for spawning generations of Islamic militants and threatening global security, has been making millionaires like newly minted coins.

As Western governments have fretted about Pakistan's nuclear weapons falling into the hands of militants, the Karachi Stock Exchange's main share index has risen more than 10-fold.

And it is not just that Karachi is a thinly traded market, able to be dragged skyward at time by speculators. Profits have taken off as well.

Even last month's assassination of opposition leader Benazir Bhutto, and the brief but terrifying tornado of violence it unleashed, failed to make much more than a dent in the market.

Businessmen are more worried than brokers, but all agree it will take more than Bhutto's death to destroy this boom, which has been based on open-door investment policies and privatization.

"It's sad, and it does affect the business, but I guess it's been happening for so long that people just get used to it," shrugged Omer Sabir, who sells luxury sports cars from upwards of $100,000 each at Karachi's only Porsche dealer.

Home to 14 million people, Pakistan's biggest city is booming.

The port city, notorious as the place where U.S. journalist Daniel Pearl was kidnapped and beheaded by Islamist extremists in 2002, has seen property prices soar and shopping malls sprout up.

Foreign banks such as Standard Chartered and ABN AMRO have bought up local banks. Just this month Bank Muscat and Japan's Nomura Holdings agreed to a $200 million takeover of Pakistan's Saudi Pak Bank.

Barclays is also looking to build a local business.

Even during frequent power blackouts, Pakistan's bankers can see by the light of their generators that profits are good, among the strongest bank returns in the world, says Invisor Securities.

At Karachi's underground night-club scene, which is literally, underground, sons and daughters of the upper middle-class drink vodka, whisky or just soft-drinks in glittering semi-darkness and listen to DJs play the latest beats.

But right now, the party might be coming to an end.

The stock market is still trading just 3 percent below its life-time closing high of 14,814.85 points, but the outlook is far less certain than six years ago, when President Pervez Musharraf began his reforms, spurring local and foreign investment.

The economy, which averaged around 7 percent annual growth in the five years to June 2007, is slowing and inflation is rising. Foreign investment and the farm sector, two important drivers of Pakistan's economic success story, have also moved down a gear.

The street is also getting angry.

For many Pakistanis, the boom has been mainly a spectator sport. They can see the new shopping malls but cannot afford to buy anything there. About a quarter of them still live in poverty, earning around 1,000 rupees, or $16, a month, though the proportion has been falling, according to 2006 government data.

A few blocks away from the Porsche dealership, men and women line up in vain for hours to buy a bag of flour at a government store. Power blackouts make the winter bleaker still.

"I have been coming here for a month and, look, my hands are empty," said Taj Fareed, showing his palms as he stood near a crowd jostling at the door of a government store to buy flour.

So if these Pakistanis find their voice in elections scheduled for Feb. 18, will there be changes in store for broad economic policy and the rich crust of Pakistan society?

The answer from businessmen, political analysts and economists seems to be a unanimous but rather hopeful "no."

"Whoever comes in next, I can assure you that they will follow the same policies," said Javed Faruqi, leaning back in his chair in the high-rise executive suite of Samaa, one of several new TV channels born out of a surge in advertising spending.

Samaa occupies the same tower as business channel CNBC Pakistan, a Middle East-backed franchise launched in late 2005.

"I don't see it going into reverse but there may be a struggle with the forces who do want it to go into reverse," admits Tahir Ikram, programming director for CNBC Pakistan.

Islamist parties, and their campaigns against Western decadence and corruption, appeal strongly to the poor, but recent polling suggests the mainstream parties will dominate the next government, assuming the Feb. 18 elections are free and fair.

Bhutto's party, Pakistan's biggest, has been campaigning under the slogan "Food, Shelter, Clothing" and still plans to contest the elections, but political analysts do not expect it to usher in a state-driven economy if it wins power.

"The overall direction of the Pakistan economy would be the same," said political analyst Hasan Askari Rizvi.

Riaz Haq's Note: This Reuters story was published in January 2008, prior to the elections of Feb 2008 in Pakistan. The investor enthusiasm has not dampened in spite of the defeat of pro-Musharraf PML(Q) and increasing violence in major cities. On the contrary, the KSE-100 has made new highs above 15000 level in March 2008. Please see my blog post: Pakistan's Stocks Continue to Defy Gravity.

Monday, March 10, 2008

Pakistan Stocks Continue to Defy Gravity

As growing concerns about the state of the US economy took their toll on share prices in Asia, the Karachi stock market continued its rally and KSE-100 touched a new peak of 15,085.18 points level during last week ending on March 8, 2008.

"The signs of formation of coalition government of PPP, PML (N) and ANP have revived investors' confidence and they have once again started investment in the share market, which pushed the index to new high level," analysts said, according to The Business Recorder, Pakistan's Financial Daily.
The KSE-30 index went up by 239.90 points, to close at 18,607.19 points level from 18,367.29 points.

Market capitalization jumped to a new peak of Rs 4.661 trillion from Rs 4.618 trillion, an increase of Rs 42.465 billion. Average daily trading volume of ready market stood at 285 million shares, while overall some 1.294 billion shares were traded during the week.

On Friday, the Indian market closed in the deep negative territory with the BSE Sensex closing below the psychological level of 16000 and the NSE Nifty settled below the 4800 mark. The market tumbled since the initial bell tracking the news from the global markets and remained in the negative territory throughout the trading session. Also, the rising of inflation to 5.02% in February 2008 added to the negative sentiments in the market. The inflation grew to nine months high due to rise in prices of fruits, vegetables and oil seeds. The BSE Sensex closed lower by 566.56 points at 15,975.52 and NSE Nifty fell by 149.80 points to close at 4,771.60. We expect that the market may remain volatile during the trading session.

The markets in Tokyo, Taipei and Shanghai did not fare any better. The Nikkei and other indexes in Asia were in negative territory. The stock market in Shanghai fell by 3.59% to a seven month low on continued inflation worries.
Taiwan's benchmark Taiex index fell 2.7%, which was its biggest fall for six weeks.

In spite of the KSE-100 defying gravity seen in the rest of Asia and the world, there is still a big cloud hanging over the market with the expected transfer of power in the next few weeks. Any hint of serious confrontation between the new government and President Musharraf could easily erase all the stock market gains and pull the KSE-100 into deep negative territory.

Thursday, March 6, 2008

Rich-Poor Gap: India's Newly-Minted Billionaires

The booming Bombay stock market in 2007 and the benefits of globalization have seen India's billionaires list swell to 40 on the Forbes Billionaires List. The Indian billionaires combined wealth has more than doubled from $170 billion to $351 billion in 2007. While Bill Gates has slipped to number three spot from number one, the number 4, 5, 6 and 8 spots in the top 10 are now occupied by Lakshmi Mittal, Mukesh Ambani, Anil Ambani and KP Singh from India.

The news of the newly-minted Indian billionaires is bringing sharper focus on the growing rich-poor gap in India. The Times of India reports Communist Party leader Sitaram Yechury claiming that on the one hand, 36 Indian billionaires constituted 25% of India’s GDP while on the other, 70% of Indians had to do with Rs 20 a day. "A farmer commits suicide every 30 minutes. The gap between the two Indias is widening," he said.

The growing wealth gap is also a big concern in other BRIC countries such as China and Russia. Fully a third of the new billionaires come from Russia (35), China (28) and India (19). The Chinese government is trying to tackle the growing rich-poor, urban-rural divide, a major cause of the rise in incidents of social unrest and violence in the world's most populous nation. The estimates of the urban-rural income gap vary by anywhere from 3 times to six times.

It is not unusual to see the rich-poor gap in the early stages of explosive growth in economies where the focus is on wealth creation rather than distribution. However, if this continues for an extended period of time, there is significant potential for widespread social unrest and serious political insatiability that can threaten the very foundations of a nation. From the recent speeches by the political leadership in India and China, it is clear that there is an acknowledgment of the issues and willingness to work on more equitable distribution of the fruits of progress.

Click here for complete list of Forbes Billionaires.

Wednesday, March 5, 2008

Merrill Lynch Launches Fund Investing In Pakistan

As individual and institutional investors scour the globe looking for higher returns on their investments, they are discovering markets in emerging economies outside the well known BRIC (Brazil, Russia, India and China) countries. Karachi Stock Exchange in Pakistan represents such a discovery. Four Pakistani companies are now in a new index fund called the Frontier Index fund launched by Merrill Lynch today. To be included in the index, companies must have a market capitalization of at least U.S. $500 million, a three-month average daily turnover of at least U.S. $750,000 and a foreign ownership limit above 15 percent. The composition of the index will be reviewed twice a year, in February and August.

Stocks listed in the Middle East make up 50.0 percent of the new index, followed by a 22.6 percent share for Asia, 14.1 percent for Europe and 13.3 percent for Africa. The top three countries represented in the index are the UAE (23.1 percent), Kuwait (18.1 percent) and Pakistan (13.6 percent). Banks dominate the index (39.4 percent), followed by financial services companies (25.7 percent) and oil and gas firms (13.6 percent).The largest country weight outside the Middle East is Pakistan, with four companies included. Despite the political turbulence in Pakistan this year, the benchmark KSE 100 index is up 5%, while neighboring India's key index is down almost 20%.

It should be noted that the KSE-100 has been one of the hottest stock markets in the world for several years in a row. It rose 44% last year in spite of the political uncertainty and ongoing violence in the country. Pakistan's economy has seen strong growth of 7-8% per year for several years now. Pakistan is among the "Next-11" counties designated by Goldman Sachs as attractive investment markets and it has been called "safe haven" for foreign investors by Merrill Lynch Asia Chief Strategist Mark Matthews.

Tuesday, March 4, 2008

Pakistan's Success Story: Foreign Direct Investment

Talking about foreign direct investment (FDI) in emerging economies, former US Federal Reserve Chief Alan Greenspan says: “But clearly the Licence Raj (in India) has discouraged foreign direct investment. India received $7 billion in FDI in 2005, a sum dwarfed by China’s $72 billion. India’s cumulative stock of FDI at 6 per cent of GDP at the end of 2005 compares with 9 per cent for Pakistan, 14 per cent for China, and 61 per cent for Vietnam. The reason FDI has lagged badly in India is perhaps no better illustrated than by India’s unwillingness to fully embrace market forces. That is all too evident in India’s often statist response to economic problems. Faced with rising food inflation in early 2007, the response was not to allow rising prices to prompt an increase in supply, but to ban wheat exports for the rest of the year and suspend futures trading to ‘curb speculation’ — the very market forces that the Indian economy needs to break the stranglehold of bureaucracy.” (p. 322 of "The Age of Turbulence" by Alan Greenspan.)

Since Mr. Greenspan wrote the words above, the FDI in Pakistan has continued to rise
and remains a success story. The total investment grew by 21.4 percent or 23 percent of the GDP and Foreign Direct Investment (FDI) posted a growth of 71 percent from US $ 3.5 billion to US $ 6.0 billion in 2006-07. The FDI represents a deeper and longer term commitment than portfolio investments which tend to be less durable and less reliable. This has happened in spite of the continued political instability and security issues.

As Mr. Greenspan points out, this dramatic increase in FDI for Pakistan has been made possible by the Pakistani government's liberal policies of allowing foreign investments in many sectors of the economy and the ability of the foreign investors to repatriate 100% of their profits in US dollars. These profits have continued to rise as the Pakistani economy has boomed with the GDP doubling over the last 5 years.
Foreign investors sent $519 million as their profits abroad during first seven months of the current fiscal year as compared to $467.9 million of the corresponding period of 2006-07, depicting an upsurge of some 11 percent.

State Bank's statistics show that profit repatriation by foreign investors registered a significantly increase of $51.4 million during July-January of the current fiscal year. The major share of repatriation was seen in the power sector, in which foreign investors have made new investments during the last few years due to the power shortage in the country, reports the Business Recorder, a Pakistani financial daily newspaper.

One of the downsides of liberalization has been an upsurge in inflation in Pakistan which India has attempted to curb by actions such as banning export of wheat and suspending futures trading which Greenspan criticizes in his book. While India has succeeded in the short-term in controlling wheat prices, the longer term consequences of such policies are usually detrimental to the economy.

Sunday, March 2, 2008

Is Euro Ready To Replace US Dollar As Reserve Currency?

There are mounting global concerns about sharp decline in the value of US dollar against the euro and other major world currencies. Not only has it fueled inflation with higher prices of basic commodities such as food grains, oil and metals but it has also diminished the value of the reserves held in dollars by the vast majority of central banks around the world. These issues are giving to rise to a discussion of how long can the US dollar remain as the currency of choice for central bankers. To understand this discussion, let's look at the history of reserve currencies in the past and the current situation with global trade.

When the 20th century began, the U.S. was already the world's biggest economy, but the British pound still accounted for nearly two-thirds of official foreign-exchange reserves held by the world's central banks. The dollar didn't become the dominant currency until after World War II. Even then, some commodities still traded in pounds: The London sugar market didn't jettison sterling for a dollar-denominated trading contract until around 1980. The history lesson here is that, while the reserve and trade currencies can and do change, it takes a significant re-architecture of the world economy and trade and significant amount of time for it to happen. Nearly two-thirds of the world's central-bank reserves remain denominated in dollars, according to data from the International Monetary Fund, despite widespread fears of a mass exodus from the currency. The euro accounts for about a quarter -- up from 18% when it was introduced in 1999, but less than its predecessor currencies' share in 1995. Because the U.S. is such a huge trading partner for so many countries, the reserve buildup isn't easily unwound.
According to the Wall Street Journal, the dollar is also deeply entrenched in world trade. Businesses lower their transaction costs by dealing in a common currency. More than 80% of exports from Indonesia, Thailand and Pakistan are invoiced in dollars, for instance, according to the latest figures available in research by the European Central Bank, although less than a quarter of their exports go to the U.S.

While many nations want to change at least part of their reserve holdings from US dollars to euros, they know if they sell a significant share of their dollar reserves, it would weaken the dollar's value. That would potentially hurt their own trade competitiveness, and push down the value of their remaining dollar reserves. If they keep the dollars, a buildup of unwanted assets would only mount.
"There is no alternative to the dollar as a trading currency in Asia," Andy Xie, a Hong Kong-based economist told the Wall Street Journal. "Eventually, the renminbi [yuan] will replace the dollar in Asia, perhaps in our lifetime. But it will take at least 30 to 40 years."