Pakistan Capital Markets and the IMF - Friend or Foe?

Adnan AfridiManaging Director

Karachi Stock Exchange

1

The Pakistan Economy

2

ElectionsElectionsmeant that meant that

key economic key economic decisions were decisions were

not madenot made Commodity Commodity prices hit all prices hit all

time high –Oil time high –Oil reached $147 reached $147

per barrelper barrel

Rupee Rupee under under

pressurepressure

Investor Investor confidence confidence

declineddeclined

Capital Capital flight – foreign flight – foreign

exchange exchange reserves reserves declineddeclined

Foreign Foreign Investment Investment

OutflowOutflow

Inflation Inflation hit all hit all

time hightime high

Impact on the Capital Market

3

Exchange was forced to act and impose floor on Aug 27 prices to provide a cooling down period to the market

• 2008 average daily volumes were around 50% below average daily volumes of 2007• 2008 average daily values were also around 50% below average daily values of 2007

Source: KSE Research

The KSE 100 Index was one of the worst performing markets of 2008

Source: KSE Analysis

COUNTRY INDEX Jan 1 2008 – Dec 31, 2008(Local currency)

UK FTSE 100 -31.3%

Kuala Lumpur KLSE Composite -39.3%

US Nasdaq Comp. -40.5%

Seoul Composite -40.7%

Tokyo Nikkei 225 -42.1%

Taiwan T. Weighted -46.0%

Bangkok Set -47.6%

Hong Kong Hang Seng -48.3%

Singapore Strait Times -49.4%

Jakarta Composite -50.6%

Bombay Sensex -52.4%

KSE 100 Index -58.3%

China Shanghai Comp. -65.4%Source: KSE Research

Key Reasons for Market Decline

5

May ‘ 08 August’08

Exchange Rate US$1 Rs. 66.25 Rs. 75.81

Reserves at SBP US$ 11.9 billion US$ 5.76 billion

Inflation 19.3% 25.3%

Foreign Investor Portfolio Investment

Jan – May 08US $115 million

(outflow)

Jan – August 08US$ 332 million

(outflow)

Oil Prices US$ 111.91 US$ 118.15(reached US$ 147 in May- June)

• Interest rates registered a 500 basis point increase in 2008• Fear amongst investors of policy changes that could impact viability of listed

companies (media speculation has contributed to these fears).• Last year of previous government, care-taker government and transition period of

current government has meant a 18 month period where key decisions with respect to economy were not taken (e.g. removal of subsidies, reduction in govt. borrowing, etc.)

Source: KSE Research

Enter the IMF

6

Key Features of IMF Program

• Homegrown package

• Pakistan received a US$ 7.7 billion loan from the IMF on November 24, 2008

• Pakistani Government and Finance Officials in consultation with IMF set the main parameters and criteria on which performance would be assessed.

– Real GDP growth of 2.5% for 2008-09 and 4% in 2009-10– Annual average CPI of 20% in 2008-09 and 6% in 2009-10– Current Account deficit of 6% of GDP in 2008-09 and 4.5% in 2009-10– Authorities to adopt a tax policy and tax administration plan– Elimination of tariff differential subsidies by end June 2009– SBP to prepare contingency plan on how to deal with problem banks– Provision of Foreign Exchange by SBP for imports of furnace oil to be ceased

7

Source: KSE Research, IMF Country Report No. 09/123 April 2009

The Day After…

8

Key Indicators have started to rebound

Pre IMF Program Post IMF ProgramCurrent

Trend

Credit default Spread on Sovereign Debt

5000bps 1700bps

Exchange Rate US$1 Rs.60 <US$ 1<Rs. 79 Rs. 80-81 Stable

Reserves at SBP US$ 3.5 billion US$ 7.1 billion

Inflation 25.3 % (Aug 08) 17.2% (Apr 09)

Discount Rate 15% 14%

Foreign Investor Portfolio Investment

Jan- Mar 2009US$ 238 million

(outflow)

April – May 2009US$ 37 million

(outflow)

Stable

9

Source: KSE Research

KSE 100 Index has made a recovery from the 5000 point level to close above 7100 points on May 26, 2009

10

• Domestic and Global Investor Confidence has been improving

• Oil prices have fallen to US$ 50 per barrel from the US$ 147 mark

• Food prices have also registered a steep decline

• Liquidity has begun to flow back into the market – average daily volumes for 2009 are 182 million

• KSE Market Capitalization has increased by Rs. 269 billion since January 1, 2009

Source: KSE Research

The Market has rebounded in 2009

COUNTRY INDEX Jan 1 2009 – May 26, 2009

Taiwan T. Weighted 45.56%China Shanghai Comp. 42.17%Bombay Sensex 40.94%Jakarta Composite 37.05%Singapore Strait Times 27.09%KSE 100 Index 22.37%Seoul Composite 22.02%Bangkok Set 20.61%Kuala Lumpur KLSE Composite 19.95%Hong kong Hang Seng 18.10%US Nasdaq Comp. 7.29%Tokyo Nikkei 225 5.09%UK FTSE 100 2.45%

Source: KSE Research

Opportunities and Challenges that the IMF Program presents to Pakistan

Challenges Opportunities

Lower Growth/Lower companies dividend

Equity more attractive than debt(could boost listings)

Tight monetary policy – could lead to company defaults

Macro economic stability attracts global portfolio investment

Consumer to put up with a reduction in subsidies; could create social instability

Government removal of subsidies to create fiscal balance (focus on development spending can spur growth)

Lower spending Reduction in government borrowing to lower inflation (all asset classes to benefit from lower inflation)

12

The following are in process:

• Demutualization of the Exchange – publically listed with strategic

investor

• Promotion of Derivative Products

• New Services (Data Vending)

• Debt Market Trading Platform

• Investors education programs

(road shows, seminars &

online training)

Future Plans of KSE

Pakistan’s story: A Resilient Nation, A Resilient EconomyPakistan’s economic and political development

GDP Growth has averaged over 5% since 1951 on the back of fundamental growth drivers

Source: BMA Research

14