Profit 5th December, 2011 by Profit Epaper

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Has social media overshadowed traditional marketing? Page 2 Hold your head high SBP Page 3 Banking on Basel – The case of Internal Rating Based approach Page 8 Pages: 7

profit.com.pk

Monday, 05 December, 2011

OGRA aiding gas theft, Petroleum Ministry takes action ISLAMABAD AMER SIAL

Govt to appoint Chinese bank as financial Advisor for IP project Selection of Chinese lead consortium as FA to help avoid US pressure g Estimated gap between demand and supply projected to increase from 1.6 bcfd in 2011-12 to over 2.5 bcfd in 2014-15 g Present value of total savings, $15.3 billion g

help avoid US pressure, the source said. Financial advisor will assist Inter State Gas Systems Limited (ISGS) in determining an optimal capital structure and financing plan for the project and for providing of political and commercial risk cover. It will be responsible for managing the entire transaction up to financial close including help in arranging financing. To avoid US pressure, a segmented approach has been adopted for the project and both the participant countries are responsible for building and operating the pipeline transportation network relating to the project in their respective territories. ISGS is responsible for the Pakistan segment of the project, which is estimated to cost $1.2 billion based on the recent provisional cost estimates. Estimated gap between demand and supply is projected to increase from 1.6 bcfd in 2011-12 to over 2.5 bcfd in 2014-15. IP pipeline project will bring in 750 mmcfd gas, first gas flow of which is expected in 2014. The project involves construction of 781 km gas pipeline from Iran Pakistan border to Nawabshah to inject gas into transmission system of the two gas utility companies. Government has been advised to start process for setting up new Independent Power Producers (IPPs) of 5,000 MW cumulative capacity, so that they should be ready for commissioning by the

ISLAMABAD

AMER SIAL

ovERNMENT is likely to appoint a Chinese bank lead consortium that also includes leading local banks, as financial advisor (FA), for $1.2 billion Iran-Pakistan (IP) gas pipeline that will bring 1.05 billion cubic feet daily (bcfd) of natural gas from Iran’s South Pars gas field to the country. An official source said negotiations with the Chinese bank lead consortium were complete and final agreement will be signed next week after holidays. He said given the importance and complexity of the project, it was essential that each aspect of the project was well planned and documented to ensure efficiency and transparency in the project’s implementation. However, he said names of the banks could not be revealed till the final agreement is signed. United States is exerting pressure on Pakistan for the last several months to abandon the project with Iran which is under UN sanctions. However, faced with crippling power shortage of 5,000 MW that is causing a loss of three per cent in GDP growth for the last few years, the country is left with no other options but to import natural gas for affordable power generation. Selection of a Chinese lead consortium as FA will

time natural gas starts flowing from Iran Pakistan gas pipeline in December 2014. official estimates based on current crude oil price project that monthly gas import bill will be in tune of $200250 million, which was lowest as compared to other options of HSFo and RLNG. Government has already decided to dedicate imported gas through IP pipeline for power sector as power shortage is projected to increase over 11,000 MW in next few years. The decision was made considering economic feasibility of Iranian gas as compared to the price of other alternatives fuels such as furnace oil, LNG and coal. Use of IP gas is estimated to result in an average annual savings of $1.2 billion against using RLNG as alternate fuel at crude price of $100 per barrel. Present value of total savings comes to $10.9 billion. Using HSFo as an alternate fuel indicates that IP gas will result in average annual savings of $1.7 billion at crude price of $100 per barrel. Present value of total savings comes to $15.3 billion. Recently imposed levy on natural gas which helps generate Rs45 billion per annum, which the government plans to use to develop the gas infrastructure for the imported Liquefied Natural Gas (LNG), Iran Pakistan (IP) gas pipeline and Turkmenistan, Afghanistan, Pakistan and India (TAPI) gas pipeline projects.

o curb the rising menace of natural gas theft, petroleum ministry has issued strict instructions to oil and Gas Regulatory Authority (oGRA) to grant no stay in cases where gas meters and connections were disconnected by gas utility companies. An official source said state owned gas utility companies had raised the issue with the ministry saying that intervention of oGRA was not only helping in gas theft but also creating other malpractices. oGRA was directed not to process any such complaints in future and if there was need to amend regulations was required it should be done immediately. Rise in unaccounted for gas (UFG) which means difference between total volume of gas purchased by the companies and volume of metered gas supplied to consumers. UFG levels of Sui Southern Gas Company Limited (SSGCL) and Sui Northern Gas Pipelines Limited (SNGPL) have remained abnormally high of over 13 per cent last fiscal year. International bench mark of UFG for companies is four per cent. According to oGRA estimates one per cent of UFG of both companies at average price of fiscal year 2009-10 translated to a revenue loss of Rs2.5b per year. Massive monetary losses in the form of high UFG losses are recovered by utilities by passing on the impact to consumers. Effective enforcement of UFG benchmarks could result in savings for consumers. Both companies, SSGCL and SNGPL, had filed petitions for review of UFG benchmarks as they claimed they were facing gas theft due to law and order situation in certain areas. Government has recently imposed gas theft act which allows imprisonment and fining people involved in gas theft. oGRA has recently recommended to the government an increase of 11 to 14 per cent in gas tariff of two gas utilities from January 01, 2012. oGRA has proposed an increase of Rs43.92 per mmBTU in tariff of SNGPL and an increase of Rs34 per mmBTU in tariff of SSGCL. If the recommended tariff is increased by government, domestic consumers will be most affected. The source said oGRA wanted to fix UFG at lower level but it was opposed by gas companies, as they wanted it to be maintained on the higher side to recover their financial losses due to theft and increase in staff. Government had forced gas utilises to reinduct 7,000 terminated employees back in their cadres.

Stiff competition with india

Rice exports decline by 10pc in last five months g

Pakistan rice exports worth $725 million by November g 1.4 million tonnes exported during July –November 2011 KARACHI GHULAM ABBAS

N stiff competition with India, Pakistan’s export of rice has been declined by 10 per cent during July-November of the financial year 2011-2012. Tackling compeTiTiTon: As India has reduced the export price of rice by almost Rs52, it has created 16 to 17 per cent difference in price in the international market for Pakistan. Islamabad has faced almost 10 per cent reduction in export of rice in terms of quantity, sources in Rice Export Association of Pakistan (REAP) told Profit. However, as the price of rice in the international market has already increased, especially for Basmati Rice, at least 5 per cent decline in

rice exports in terms of value has been recorded in the last five months. Pakistan has exported the product worth $725 million by November and under the present pace of exports the country, it is likely to miss the target of 4 million tonnes in rice exports. impacT of indian rupee devaluaTion: Even though the country has a bumper crop this year, the record decline in export price of non-Basmati rice from India is creating tough competition for the country’s products in the international market. Besides the decline in price of the Indian commodity, the 15 per cent devaluation of its currency against the dollar in the last four months has also created problems for Pakistani rice, Taufiq Ahmed Khan, former vice Chairman REAP. Rice exports were expected to be enhanced after the flood in Thailand -the biggest exporter of rice - however the ever

declining export price of rice in Delhi is creating acute uncertainty in the international market. However, he claimed, the domestic market was stable. fall ouT of Trade liberalisaTion: “This was the reason that the rice exporters here are fearful about the liberalised trade with India after granting it Most Favored Nation status,” he said adding that the exporters were still discussing the issue for submitting reply in the ministry of commerce about whether to include rice in the negative list or not. According to sources, the Indian government had reduced the minimum export price of non-basmati rice after exports failed to pick up. The government had allowed limited exports of non-basmati rice after a bumper crop in 2010-11. India had banned exports of rice, except the costly basmati variety, to beef up supplies in the domestic market and cool down soaring prices in April

2008. Presently, the increased domestic production and lower export of Basmati last year had resulted in abundant availability in the Indian domestic market. These factors brought down prices of this elite variety. power shorTfall, crippling indusTry: Earlier, Pakistani export of rice declined to 0.862 million tonnes during the first four months (July-october) of this financial year, against 0.977 million tonnes in the corresponding period last year. The decline, despite of the challenge posted by India, was also due to the hours long power break downs which were affecting the business of almost 400 rice mills in both Punjab and Sindh. The present situation would also affect the over all exports of the country. It was estimated earlier that shipments from Pakistan may exceed 4 million tonnes with the production of 6.5 million tones; an increase of 38 per cent during 2011- 2012.

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Monday, 05 December, 2011

debate

Greater horizonS, unexplored optionS

Has social media overshadowed traditional marketing?

HAyA HAMID

recent advertising assignment at my university entailed that I locate as many ads of certain products as I could in my city. out driving with my siblings I realised that while I was deliberately scanning the billboards at every traffic light, they were both busy texting. At home, during ‘humsafar’s interval, my mother switched the channel, my father shut down all pop up advertisements on any website he opened without even registering its an ad and when I had to locate the number of the local vet, I gave up looking for the newspaper ten minutes into my search to go to yellow pages online. It suddenly hit me how all traditional advertising techniques, all techniques that I am studying presently at school are somehow getting lost in modern day noise because the audience they are supposed to cater to are oblivious to the ad presence. Even if a brand is lucky enough to establish recall within its target audience, the assurity that their product offering will be recalled too has become greatly dependant on the ‘need’ of the product, rather than the want of it.

cAptUring UrbAnised stUdents The Jang group website attracts nearly 1.8 million eyeballs from within Pakistan, monthly. This is more readership than their print newspaper. This raises a

services go on an all time high for telecom companies because the audience wants to sync its cyber presence with its physical one. The odds make us realise that even in difficult or trying situations, a

UnderstAnding tArget AUdience

Ad-men need to evolve with the explosive market to survive

Not quite. Though the modes of advertising are changing, and the sensible thing for advertisers to do is to adapt to the trends accordingly a huge question of the quality of ads also needs to be addressed. Pakistan’s most successful brand in terms of global marketing is Coke Studio with Ufone ranking second. Why is it that people who do not watch the television have all seen Ufone ads, and they have not you-tubed them like coke studio either? Quality of advertisements in Pakistan either lacks sustainable themes or fails to effectively ally with the moods of the Nation, leading them to fall from memory without a lot of difficulty. What Engro Foods managed during ramazan, year after year is a success story of aligning the most surface emotive side of Pakistan with their products, and Surf Excel’s ability to change the image of stains from bad to good can also be credited to effectively wheedling out emotions during their television commercials. Understanding the target audience as well as the dynamic and almost explosive market changes are the challenges that Pakistani advertisers and marketers face today. With the ability to change a want into a need, and more modes of communication open to them than ever before, it would be a shame if they are unable to exploit the opportunity both in terms of commercial selling and national brand building.

Pakistan’s most s successful brand in term of global marketing is Coke Studio with Ufone ranking second

Major paradigm shift in Telecom sector marketing strategies

Are mArketers evolving? With the traditional advertising touch points changing drastically within Pakistani society, the question arises if Pakistani marketers and advertisers are evolving at the same pace as the modes of advertising are. A recent facebook observation noted that during the two hours of the PTI rally in Lahore, there was an increase of 20,000 fans on the page. At the same time, the MQM rally commanded 0.03% of the total twitter population globally. Whether this was the result of pre planned televised campaigns or print promotions, the question of advertising pace of ‘official’ marketers does get answered with a big negative. According to PTA numbers, nearly 22 per cent of Pakistan’s population is online. Given the fact that we rank 25th in global facebook presence, generating online promotion and advertising through word of mouth seems to be the safest bet for improved advertising of companies, and the government.

the 3rd largest in the world, it comes as no surprise that telecom companies would market their offerings through text services and gain an edge over traditional modes. They do this mainly by offering their massive clientele services to subscribe to news updates, cricket info, weather reports, and even entertainment all in their pockets. Even though heavy tablet penetration still seems a long way even in official situations, the cell phones have with due respect taken over the paperback market. Does that mean then that instead of sitting and designing a print ad, we need to email that to our client, where it may very easily get filtered to their junk mail labeled as spam?

fundamental question, especially for the Pakistani government, if investing in TvC’s or print ads is a wise option especially if they want to capture the massive urbanised student population that is very actively engaged on social media. The only time working individuals or students pause all activities to sit in front of the television is during a Pakistan cricket match, at that time too GPRS

majority of the population would prefer to get news updates online or through their telecom services rather than sitting in front of news channels for countless hours.

telecom indUstry With 72 million active sim users in Pakistan, and 130 per cent growth rate in the telecom industry,

The writer is an undergraduate student at the Nust Business School.

Is modern capitalism sustainable?

KennetH Rogoff

am often asked if the recent global financial crisis marks the beginning of the end of modern capitalism. It is a curious question, because it seems to presume that there is a viable replacement waiting in the wings. The truth of the matter is that, for now at least, the only serious alternatives to today’s dominant Anglo-American paradigm are other forms of capitalism. Continental European capitalism, which combines generous health and social benefits with reasonable working hours, long vacation periods, early retirement, and relatively equal income distributions, would seem to have everything to recommend it – except sustainability. China’s Darwinian capitalism, with its fierce competition among export firms, a weak social-safety net, and widespread government intervention, is widely touted as the inevitable heir to Western capitalism, if only because of China’s huge size and consistent outsize growth rate. Yet China’s economic system is continually evolving. Indeed, it is far from clear how far China’s political, economic, and financial structures will continue to transform themselves, and whether China will eventually morph into capitalism’s new exemplar. In any case, China is still encumbered by the usual social, economic, and financial vulnerabilities of a rapidly growing lower-income country. Perhaps the real point is that, in the broad sweep of history, all current forms of capitalism are ultimately transitional. Modern-day capitalism has had an extraordinary run since the start of the Industrial Revolution two centuries ago, lifting billions of ordinary people out of abject

poverty. Marxism and heavy-handed socialism have disastrous records by comparison. But, as industrialization and technological progress spread to Asia (and now to Africa), someday the struggle for subsistence will no longer be a primary imperative, and contemporary capitalism’s numerous flaws may loom larger. First, even the leading capitalist economies have failed to price public goods such as clean air and water effectively. The failure of efforts to conclude a new global climate-change agreement is symptomatic of the paralysis. Second, along with great wealth, capitalism has produced extraordinary levels of inequality. The growing gap is partly a simple byproduct of innovation and entrepreneurship. People do not complain about Steve Jobs’s success; his contributions are obvious. But this is not always the case: great wealth enables groups and individuals to buy political power and influence, which in turn helps to generate even more wealth. only a few countries – Sweden, for example – have been able to curtail this vicious circle without causing growth to collapse. A third problem is the provision and distribution of medical care, a market that fails to satisfy several of the basic requirements necessary for the price mechanism to produce economic efficiency, begin-

ning with the difficulty that consumers have in assessing the quality of their treatment. The problem will only get worse: health-care costs as a proportion of income are sure to rise as societies get richer and older, possibly exceeding 30% of GDP within a few decades. In health care, perhaps more than in any other market, many countries are struggling with the moral dilemma of how to maintain incentives to produce and consume efficiently without producing unacceptably large disparities in access to care. It is ironic that modern capitalist societies engage in public campaigns to urge individuals to be more attentive to their health, while fostering an economic ecosystem that seduces many consumers into an extremely unhealthy diet. According to the United States Centers for Disease Control, 34% of Americans are obese. Clearly, conventionally measured economic growth – which implies higher consumption – cannot be an end in itself. Fourth, today’s capitalist systems vastly undervalue the welfare of unborn generations. For most of the era since the Industrial Revolution, this has not mattered, as the continuing boon of technological advance has trumped short-sighted policies. By and large, each generation has found itself significantly better off than the

As industrialisation and technological progress spread to Asia (and now to Africa), someday the struggle for subsistence will no longer be a primary imperative, and contemporary capitalism’s numerous flaws may loom larger

last. But, with the world’s population surging above seven billion, and harbingers of resource constraints becoming ever more apparent, there is no guarantee that this trajectory can be maintained. Financial crises are of course a fifth problem, perhaps the one that has provoked the most soul-searching of late. In the world of finance, continual technological innovation has not conspicuously reduced risks, and might well have magnified them. In principle, none of capitalism’s problems is insurmountable, and economists have offered a variety of market-based solutions. A high global price for carbon would induce firms and individuals to internalize the cost of their polluting activities. Tax systems can be designed to provide a greater measure of redistribution of income without necessarily involving crippling distortions, by minimizing non-transparent tax expenditures and keeping marginal rates low. Effective pricing of health care, including the pricing of waiting times, could encourage a better balance between equality and efficiency. Financial systems could be better regulated, with stricter attention to excessive accumulations of debt. Will capitalism be a victim of its own success in producing massive wealth? For now, as fashionable as the topic of capitalism’s demise might be, the possibility seems remote. Nevertheless, as pollution, financial instability, health problems, and inequality continue to grow, and as political systems remain paralyzed, capitalism’s future might not seem so secure in a few decades as it seems now. Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University, and was formerly chief economist at the IMF

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monday, 05 december, 2011

editoriAl

Luxury of increasing product prices

Debt, bubble and austerity

ISING external and internal debt puts the government in a precarious position. The problem is compounded because a) borrowed amounts are increasingly channeled towards nondevelopment expenditure, b) the government’s own revenue generation capability – tax and export receipts – is severely compromised and c) reckless borrowing of today will have to be repaid tomorrow, putting the current account and currency strength in grave danger only to fund the government’s day to day functioning. That is not good. Wherever there is debt, especially nonproductive debt, there is sure to be austerity. And increasingly, as is seen practically across the world presently, those who consume the debt are far removed those whose labour is milked to pay for it. Governments overflowing with debt quickly form an addiction for free money (it’s not very likely they will hold power

when time comes to pay the debt back). And however much they borrow, much more still will have to be paid back. The ‘going’ solution, of course, is public austerity, which means increasing taxes on the few that care to pay them to fund political ineptitude. That is unsustainable. Pakistan, with its debt nearly doubling in the short time this government has held office, is now well down this particular, painful road. Soon, people’s cost of living will register unnerving advances because of the government’s stubbornness on the debt issue. Practically every day Islamabad borrows millions just for the government to function. Most of these funds are not invested. They will not engineer second round returns. Yet they will have to be repaid. Already, this wrongheadedness has undone a good year of first tight and then easy monetary policy. Sane heads need to prevail and the debt bubble deflated sooner rather than later.

AS curtailment can certainly be in the running for the most hated word of the year, if there ever was one. Amongst those who have a particular disliking for the phrase, fertiliser manufacturers must be at the top, facing a cumulative 55 per cent curtailment YTD in 2011. Like some other facets of Pakistani life, news flows of gas being restored is met with ironic joy and relief – albeit short lived. Everyone seems to complain; from industrialists to CNG stations to household consumers. With all pun intended, give them gas man! But I often ask myself why should fertiliser manufacturers complain so much? Fine, gas is the primary feed for urea production, but compared to others, they seem to be at a vantage point in so far mitigation from supply shortages is concerned. This is because fertiliser manufacturers have the real business luxury of increasing product prices as soon as their offtake drops owing to production constrains. This emanates from considerable demand inelasticity and a decent gap between local and international urea prices – the result being that the bottom line effect is a protection of margins. We have seen this over the past year where the industry has been subject to this phenomenon. What would be very interesting is to value this ‘real option’; just a side consideration for the more financially inclined of you. But anyway, this advantage exists and is expected to be a feature for the imminent future unless our gas supplies are replenished somehow or the authorities decide to eliminate the CNG fad that keeps gripping the country. The latter is not a bad idea but that’s talking on a different tangent altogether. Back talking about urea price increases, another, perhaps somewhat less talked about question springs to mind. Fertiliser prices for all companies move in tandem; possibly defying the stereotype dynamics of a competitive structure. The fertiliser sector can be categorised in two: (i) those who are supplied gas from the SNGPL network and (ii) those plants which are on the SSGC network. The

What happened to the economic principle of lower price would result in higher demand?

Islamic interbank benchmark rate

Trade-with-India argument

Dr Dar has shared a lot of valuable knowledge with the readers. Any person who has some interest in Islamic banking and finance knows very well the importance and urgency of an Islamic benchmark for pricing financial products in the Islamic banking market. In fact, it was long awaited. And as suggested by the writer, Islamic Interbank Benchmark Rate (IIBR) needs to be scrutinised from Shari’a and economic perspective. There is high time for Muslim world to contribute in the development of Islamic banking by participating in Islamic banking transactions and activities and to segregate Islamic banking from conventional banking for good order sake and purity.

After long term reliance on USA, now Pakistan has to open up itself to other countries as well, especially neighboring counties. Pakistan already enjoys FTA with China and India shall not be ignored. The main argument against MFN status to India is that Pakistani local industry will suffer; however, this is not the case. Due to MFN, Pakistan’s competitiveness in agricultural goods will increase and it will be able to compete with Indian goods. Trade is the solution to many problems between countries, which should be considered because only trade can resolve conflicts between India and Pakistan. We cannot afford long term enmity with India.

nAWAB ALI SHAH

WAHAB KHAn KHAttAK

LAHoRE

Aahyan mumtaz

pESHAwAR

Hold your head high SBP

sakina Husain

T seems that SBP put on its cap of wisdom this time around, quite a turnaround from the previous statement, if one may consider thankfully so. While inflation may always be monetary phenomenon, in the case of Pakistan, the last two years show that growth is not. The time now demands, a knock on Keynes’ grave and a plea of invocation. very little would be possible otherwise. The Keynesian school of thought lays it simply; budget deficits are acceptable if

the economy seeks revival. This implies that if the economy is trapped in a low growth slump, then the onus lies on the government to take broad leaps of “investment”. The irony of this proclamation has somehow made it binding on all governments across the global to run huge deficits and subsequently take on massive levels of debt without fulfilling the impending remaining condition; creation of capital. In the case of Pakistan, all fully realize that PSDP, synonymous with capital expenditure, is a residual variable. If it were not, then it would not be so conveniently revised down each year. For instance, expenditure to be incurred under the pretext of PSDP by the federal government initially amounted to Rs446 billion in FY10 to be subsequently revised down to Rs310 billion. Similarly, the designated amount for FY11 stood at an even lower Rs290 billion to finally arrive at Rs196 billion only. Adding to this predicament is the lack of transparency; who knows what

‘human’ road, bridge and hospital this amount is feeding. The SBP, in most monetary policy statements has gravely stressed upon the need to increase the tax to GDP ratio to reduce the need to borrow. What it does not list is that the government needs to thank its lucky stars that most of the money that it spends does not come from the average person’s pocket. Else no one would spare whips and blows on the government’s oversized pot belly for spending their money on adding more layers of unwanted fat. Today, out of a population of more than 170 million, only 1.7 million people pay taxes. of this pinch of salt, more than 1.6 million belong to the lowest tax bracket, an insignificant lot especially in terms of demanding any sort of accountability from the government. Doing some basic calculations can build an interesting hypothesis; if there are about 168 million people who do not pay

SHAHAB JAFRY business editor

KUNWAR KHULDUNE SHAHID sub-editor

BABUR SAGHIR creative Head

ALI RIZVI news editor

MAHEEN SYED sub-editor

HAMMAD RAZA layout designer

two gas providers have different curtailment schedules and so their user companies have been subject to different levels of supply shortages. But whenever one company increases prices owing to additional curtailment, other companies replicate the move in the pursuit of higher prices. What happened to the economic principle of lower price would result in higher demand? or does this not apply in this case? First of all, the fertiliser sector is hardly a competitive industry. The industry constitutes seven producers with the top three (FFC, ENGRo, FFBL) holding 80 per cent market share of urea capacity. The HHI for the industry comes out to be around 2,500 and if we factor in crossholdings amongst certain manufacturers, concentration may in reality be higher. Urea may seem to be a homogenous product but this does not provide reason for prices to move together in the wake of shortage instigated price hikes. That’s because an important aspect of product differentiation is easy access to substitutes. This is a feature that farmers cannot enjoy as it remains costly to purchase from other manufacturers owing to transport costs rather than purchase from close proximity distributors even if a price differential exists. But let’s suppose for argument sake that these transport costs are eliminated. Does it seem that cartelisation in present in the fertiliser sector or is there still a case for similar price movement across the board? The answer may lie in competition behaviour for which a little bit of game theory needs to be examined. Assuming that one company increases its price and the other does not, then theoretically the latter should capture the former’s client base. However, factoring in the current setup of distribution implying limited access to substitutes, the benefit from keeping prices low diminishes. Therefore, the more profitable thing to do is to increase your price as well. When this is applied across the board, theory suggests that all manufacturers should be following suit whenever one company increases its price as the benefit of improving margins outweighs the prospect of captured demand in a supply shortage environment. But this does not imply that the opposite should be true nor should all urea prices be at the same level. This is what we have observed over the past year; upward price movements have been in tandem while manufacturers maintain different urea price levels, bound by the maximum difference that can be kept till it is feasible for the customer to shift to other suppliers. Rivalry between fertiliser manufacturers does exist but it does not manifest itself due to the dynamics of the industry itself; what is the point of engaging in competitive activity where there is no economic reason to do so? other factors, such as barriers to entry and bargaining power of buyers, also play roles which are indeed real influencers. often the action of increasing prices is confused with collusion but surely the maxim of guilty till proven innocent does not apply here. The writer is a financial analyst with Pakistan Credit Rating Agency (PACRA)

monetary policy statements gravely stress upon the need to increase the tax to gdp ratio to reduce the need to borrow

tax and about 111 million people (60 per cent of the population) who live below the poverty line, then there are about 57 million people who are evading taxes in some form or enjoy some sort of illegal privileges which somehow exempt them from contributing anything to the national exchequer. The tax to GDP ratio, has hovered in the around nine per cent since the last decade, implying that non-tax payers continue to enjoy impunity come what may. Narrowing the analysis to take into account demographics, labor force surveys indicate that the workforce numbers in Pakistan lie somewhere in between 5-6 million people. If 45 per cent of these people are employed in the undocumented agriculture sector, then about 3.3 million people are employed

in the industrial and services sector. And half of them pay taxes! This could primarily mean that others earn so little that they do not even fall in the taxable category! one can only hope that this consumptive government realises that it would be able to extort, only if the people have something to offer. Thus the major incentive and a fun twist to corruption would be to give people something to start with. In all this, one can only empathise with SBP, the government’s most rebellious pawn, for trying to play its bit fairly, at times. The writer is an economic researcher and freelance financial journalist. She can be reached at sakina.husain@gmail.com

For comments, queries and contributions, write to: MUNEEB EJAZ layout designer

Email: profit@pakistantoday.com.pk Ph: 042-36298305-10 Fax: 042-36298302 Website: www.pakistantoday.com.pk

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Monday, 05 December, 2011

newS

The supply of gas will improve in January next year and situation can only improve with eﬀective management of the utility

Petroleum Minister, Dr Asim Hussain

SBP PUMPS RS329 BILLION TO CATER TO GOVERNMENT’S BUDGETARY EXPENDITURES Rate of return for SBP’s reverse repo operations constantly increasing g Quotation range for current injection ranges between 11.58 and 11.71 per cent g

KARACHI

ISMAIL DILAwAR

ENTRAL bank pumped a huge sum of Rs329 billion, in local banking system which after drying up of foreign financing had appeared to be the only source that was catering the funds-starved government’s budgetary expenditures. Central bank, in its monetary policy decision on Wednesday, said it had no option

but to keep injecting “substantial liquidity” in the currency market to help banks cater prevailing demand for money, the main user of which, State Bank said, was the government. It said by the 28th of last month (November), outstanding amount of liquidity injected by central bank aggregated to Rs340 billion. And that excludes issuance of Rs391 billion government securities to settle lingering circular debt and commodity loans, cash-strapped government had borrowed Rs317 billion

from SBP as well as scheduled banks during a period ranging from 1st July to 18th November this year. “In this context where government is the main user of the system’s liquidity and banks remain hesitant to extend credit to the private sector, SBP faces a dilemma,” conceded the regulator. Bank said any effort to scale down liquidity injections could have implications for settlement of payments in the inter-bank market, which was an important consideration given SBP’s mandate

of maintaining financial stability. Friday saw SBP injecting another Rs329 billion in the rupee market at 11.59 per cent rate of return. Fresh liquidity money was injected by the regulator through conducting its reverse repo open market operations in market treasury bills and Pakistan Investment Bonds of 7-day maturity. Scheduled banks still remain riskaverse, as State Bank called them, and prefer investment in risk-free government papers instead of extending advances to growth-oriented private sector. Banks in Friday’s auction offered bids of Rs373.500 billion but SBP accepted bids worth Rs329 billion. Rate of return for SBP’s reverse repo

Income-spending disparity fARAKH SHAHzAD

S governments and companies around the world are searching ways to insulate themselves from price shocks, Pakistan has the most vulnerable history of commodity price surge in the region. Energy crisis has given a deadly blow to the price stabilisation mechanism in a sense that first shot of price hikes is always fired by the government on a month by month basis. It might be surprising for anyone outside Pakistan that petrol and electricity prices were increased about 1012 times in the last one year but in Pakistan it is a business as usual.

EXPLOSION IN COMMODITY MARKET The new explosion in commodity prices is likely to be fuelled by a mix of unprecedented inflation, rising electricity costs, regularly surging petrol prices and growing housing and transportation cost. The rise in food prices always brings immense profits for agribusiness houses and speculators but untold suffering for millions of ordinary people. Prices of traded food staples such as wheat, corn, rice, sugar and tea continued to surge throughout the year. But the bad news is that the upward trend is determined to shoot higher due to the prevailing market forces. In 2008, riots broke out in at least a dozen countries as food prices hit record high. The Arab Spring that brought down

the Tunisian, Egyptian and Libyan regimes were fundamentally triggered by economic and social unrest. The new surge in prices signals to unleash more widespread social unrest, as people around the world contend with the impact of the ongoing recession and governments’ austerity measures. The latest research conducted by oxfam indicates that the worldwide surge in commodity prices has clearly drawn a visible divide among developing and developed nations in levels of hunger. The primary concern of more than half of all Pakistanis when buying food is its cost while 44 per cent say they can no longer afford the same items they consumed two years ago because prices have gone beyond their reach. Most people believe that prices of oil, transportation, weather pattern or catastrophic events and government policies are major factors affecting food supply.

EFFECT ON DIETARY PATTERNS It is also noted that the global rise in food prices has also changed dietary patterns of most people during the last two years. It points out that 18 per cent of Pakistanis strongly agree that they no longer eat some foods they did in the past. Around 39 per cent somewhat agree, nine per cent neither agree nor disagree, eight per cent somewhat disagree and 25 per cent strongly disagree. Research indicates that the cost of food is the major concern of 51 per cent of Pakistanis surveyed while 28 per cent are concerned about its availabil-

ity, 19 per cent question how healthy or nutritious the food is and 22 per cent ask how safe food is to eat. Highlighting the most important factor affecting the food supply, the research finds out that 26 per cent Pakistanis blame government policies, 28 per cent consider weather patterns and catastrophic events while 23 per cent believe that oil prices and transportation charges are major factor. It points out that nine per cent Pakistanis claim that it is result of the actions of big corporations, three per cent blame consumer demand and nine per cent say it is an outcome of high input cost of food producers, including cost of credit, equipment, fertiliser and seeds.

HUNGER AROUND THE GLOBE According to the FAo, 925 million people worldwide suffered from hunger in 2010, an increase of about 150 million since 1995-97. one third of children in the developing world are malnourished. The landscape is likely to be darkened even further as Institute of Fiscal Studies (IFS) forecasts 600,000 more children will be pushed into poverty by 2013, taking the total living in ‘absolute’ poverty to 3.1m. Although IFS report is focused on United Kingdom, yet it is an eye-opener to the economies around the world in general and weak economies like Pakistan in particular. The think tank has warned that the next two years will be ‘dominated by a large decline’ in incomes. It revealed median incomes are set to fall by 7 per cent after in-

flation has been taken into account – the sharpest drop in 35 years. The study said: ‘The unprecedented collapse in living standards is chiefly due to the high inflation and weak earnings growth over this period.’ Robert Joyce, of the IFS, described it as the ‘delayed effect’ of the recession. ‘Real earnings didn’t fall for a while after the economy started contracting, partly because inflation was very low’, he said. “But inflation has risen sharply and earnings have not done so in response”, he concluded.

FALL IN LIVING STANDARDS

Never before have household living standards fallen over such a long period according to Paul Johnson, the IFS director. “We are running out of superlatives to describe just how extraordinary some of these changes are,” he said. Most of the damage to living standards is being inflicted now. The typical family will be almost £2,500 a year worse off by 2013. it is clear beyond doubt that middle-income families are suffering an ‘unprecedented collapse’ in living standards as inflation and poor wages wipe thousands off incomes. In this global perspective, Pakistan needs to have a comprehensive, proactive and forward-looking mechanism to diffuse the poverty bomb being ticked by falling income and rising prices. If went off, it is feared to sweep away the whole system in place just like Tunis, Egypt and Libya. The message is loud and clear; if a society doesn’t help the many who are poor, it cannot save the few who are rich.

Oracle announces availability of Oracle WebLogic Server KARACHI STAFF REpoRT

RACLE has announced oracle WebLogic Server, 12 c, latest release of the number one application server for conventional systems, engineered systems and cloud environments. According to a statement issued by the company, oracle WebLogic Server 12 c provides significant enhancements to help customers and partners lower their total cost of ownership and derive more value from their current application infrastructure, while accelerating development cycle

and reducing time-to-market for their applications. oracle WebLogic Server has recently achieved world record benchmark results for multi-node; dual-node; and highest EjoPS per core whereas Gartner, Inc. has placed oracle in the leaders’ quadrant of its 2011 report, “Magic Quadrant for Enterprise Application Servers.” oracle WebLogic Server is optimised to run as a high performance, mission critical, elastic cloud infrastructure on oracle Exalogic Elastic Cloud, world‘s first and only engineered system for cloud computing. oracle Exalogic Elastic Cloud is tested and tuned by or-

acle to provide the best foundation for Java applications, oracle applications and other enterprise applications with blazing performance. “With oracle WebLogic Server 12 c, customers can leverage the number one application server to get more out of their existing infrastructure, dramatically simplify application deployment and management and accelerate timeto-market with developer efficiency innovations,” said Cameron Purdy, vice president, Development, oracle. “In addition, with oracle WebLogic Server 12 c, customers are better positioned to adopt cloud computing and can leverage their existing infrastruc-

ture to create private or public cloud architectures and then easily move back and forth between on and off premise infrastructure as their requirements change. oracle WebLogic Server and oracle Exalogic Elastic Cloud provide an ideal cloud application foundation with maximum performance, scalability and reliability,” he added. As the center piece of oracle’s Cloud Application Foundation, and a core part of oracle Fusion Middleware product family, oracle WebLogic Server continues to deliver innovative new capabilities for building, deploying and running Java Platform, Enterprise Edition (Java EE) applications.

operations is constantly increasing with current operation seeing the regulator central bank setting it at 13.35 per cent against 13.26 per cent and 13.22 per cent of the previous operations. Quotation range for current injection ranged between 11.71 per cent and 11.58 per cent, State Bank reported. About its money injection operations, central bank said, the same was significantly higher than normal and appeared to have developed characteristics of a permanent nature at this point in time. The bank said marginally increasing trend of these liquidity injections also carried inflationary risk which was not consistent with the objective of achieving and maintaining price stability.

Use of single-axis trucks cause Rs15b loss per annum ISLAMABAD GNI

AKISTAN is losing about Rs15 billion per annum on the use of single-axis trucks, clearly indicating the loopholes and ignorance towards developing a comprehensive transport policy. Although, the government has been stressing on the importance of developing a long-term transport policy, but on ground nothing has improved and losses are increasing day by day. Economic Coordination Committee had also constituted a committee to review the issues pertaining to transport policy. Ministry of industries and production would be secretariat for the committee. The committee will comprise of, deputy chairman, planning commission as convener, advisor to Prime Minister on petroleum and natural resources, commerce secretaries, industries and production and communication divisions. on the other hand, despite ECC’s last decision to allow the import of used trucks, up to three years old, and buses and tractors up to five years old, the government is unlikely to allow import of CNG cars and buses. The import of CNG cars and buses could not be allowed due to shortage of gas in the country, sources added. Ministry of commerce had suggested the government to approve commercial import of buses with capacity of 40 or more seats, up to three years old, may be allowed with the condition that such buses should be certified by reputable preshipment inspection company to the effect that they have a road life of at least five years.

SECP allows Modaraba companies to charge fee ISLAMABAD STAFF REpoRT

ECURITIES and Exchange Commission of Pakistan (SECP) has allowed modaraba management companies to charge management fee out of the net annual profit of the modaraba. The decision was made in consultation with nonbanking financial institutions (NBFIs) and Modaraba Association of Pakistan. In the previous circular of 1995, the modaraba companies were barred from charging management fee of operating profit of the modaraba unless, accumulated losses of the modaraba, if any, are wiped off. To bring charging of management fee in line with the Islamic concept of modaraba, Registrar Modaraba SECP, has withdrawn the said restriction by issuing a new circular, which clarifies that management fee could be charged only once on the profit of a modaraba.

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Monday, 05 December, 2011

There are no quick fixes to the crisis; the EU should have greater powers to stop national budgets if they risk breaching the budget rules and to punish oﬀenders

newS

German Chancellor, Angela Merkel

Funds and refiners ponder oil Armageddon, war on Iran emergency reserves, as it did following the civil war in Libya, or other countries like Saudi Arabia to step into the breach. "We probably need to do this ASAP but are putting our heads in the sand so far," said one oil trader in Europe. For refiners like Italy's Eni and Hellenic Petroleum, the most pressing issue is not necessarily an unexpected outage but an import boycott imposed by their government. France has won limited support for such an embargo, but faces resistance from some nations that fear it could inflict more economic damage.

CHEAP PUNTS

IL consuming nations, hedge funds and big oil refineries are quietly preparing for a Doomsday scenario: An attack on Iran that would halt oil supplies from oPEC's secondlargest producer. Most political analysts and oil traders say the probability of military action is low, but they caution the risks of such an event have risen as the West and Israel grow increasingly alarmed by signs that Tehran is building nuclear weapons. That has Chinese refiners drawing up new contingency plans, hedge funds taking out options on $170 crude, and energy experts scrambling to determine how a disruption in Iran's oil supply -- however remote the possibility -- would impact world markets. With production of about 3.5 million barrels per day, Iran supplies 2.5 per cent of the world's oil. "I think the market has paid too little attention to the possibility of an attack on Iran. It's still an unlikely event, but more likely than oil traders have been expecting," says Bob McNally, once a White House energy advisor and now head of consultancy Rapidan Group. Rising tensions were clear this week as Iranian protesters stormed two British diplomatic missions in Tehran in response to sanctions, smashing windows and burning the British flag. The attacks prompted condemnation from London, Washington and the United Nations. Iran warned of "instability in global security." While traders in Europe prepare for a possible EU boycott of imports from Iran, mounting evidence elsewhere points to long-odds preparation for an even more severe outcome. In Beijing, the foreign ministry has asked at least one major Iranian crude oil importer to review its contingency planning in case Iranian shipments stop. In India, refiners are leafing through an unpublished report produced in March to look at fall-back options in the event of a major disruption. And the International Energy Agency, the club of industrialized nations founded after the Arab oil embargo that coordinated the release of emergency oil stocks during Libya's civil war, last week circulated to member countries an updated four-page factsheet detailing Iran's oil industry and trade. The document, not made public but obtained by Reuters, lists the vital statistics of Iran's oil sector, including destinations by country. Two-thirds of its exports are shipped to China, India, Japan and South Korea; a fifth goes to the European Union.

Hedge funds, particularly those with a global macro-economic bias, have taken note, and are buying deep out-of-the-money call options that could pay off big if prices surge, senior market sources at two major banks said. open interest in $130 and $150 December 2012 options for U.S. crude oil on the New York Mercantile Exchange (NYMEX) rose by over 20 per cent last week. Interest in the $170 call more than doubled to over 11,000 lots, or 11 million barrels. Still more traded over-the-counter, sources say. McNally says that oil prices could surge as high as $175 a barrel if the Strait of Hormuz -- conduit for a fifth of the world's oil supply, including all of Iran's exports -- is shut in.

‘CREDIBLE’ INFORMATION This month's speculation of an attack on Iran is the most intense since 2007, when reports showing that Iran had not halted uranium enrichment work fuelled speculation that President George W. Bush could launch some kind of action during his last year in office. Those fears helped fuel a 36 per cent rise in oil prices in the second half of the year. The latest anxiety was set off by the International Atomic Energy Agency's November 8 report citing "credible" information that Iran had worked on designing an atomic bomb. A new round of sanctions followed, including the possibility that Europe could follow the United States in banning imports. That alone would roil markets, but ultimately would likely just drive discounted crude sales to other consumers like China. A more alarming -- if more remote -- possibility would be an attack by Israel, which has grown increasingly alarmed by the possibility of a nucleararmed Iran. Israeli Defense Minister Ehud Barak said on November 19 that it was a matter of months, not years, before it would be too late to stop Tehran. In that context, every tremor has been unnerving for markets. Some experts say an explosion at an Iranian military base earlier in the month was the work of Mossad, Israel's intelligence agency. An unusually large tender by Israel's main electricity supplier to buy distillate fuel raised eyebrows, although it was blamed on a shortage of natural gas imports.

REFINERS BRACE No country has more reason to be concerned than China, which now gets one-tenth of its crude imports

from Iran. Shipments have risen a third this year to 547,000 barrels per day as other countries including Japan reduce their dependence. Sinopec, Asia's top refiner, is the world's largest Iranian crude buyer. The Foreign Ministry and the National Development and Reform Commission, which effectively oversees the oil sector, have asked companies that import the crude to prepare contingency plans for a major disruption in supply, a source with a state-owned company told Reuters. The precautionary measure preceded the latest geopolitical angst and is broadly in line with Beijing's growing concern over its dependence on imported energy. Earlier this year it issued a notice for firms to prepare for disruptions from Yemen. But the focus has sharpened recently, the source said. "The plan is not particularly for the tension this time, but it seems the government is paying exceptionally great attention to it this time," said the source on condition of anonymity. In India, which gets 12 per cent of its imports from Iran, refiners had a potential preview of coming events when the country's central bank scrapped a clearing house system last December, forcing refiners to scramble to arrange other means of payment in order to keep crude shipments flowing. That incident -- in addition to the Arab Spring uprising and the Japanese earthquake -- prompted the government to document a brief but broad strategy for handling major disruptions. The document, which has not been reported in detail, says that India could sustain fuel supplies to the market in the event of an import stoppage for about 30 days thanks to domestic storage, and would turn to unconventional and heavier imported crude as a fall-back. It also urged the country's stateowned refiners to work on developing domestic storage facilities for major oPEC suppliers, consider hiring supertankers to use as floating storage and to sign term deals to price crude on a delivered basis, a copy of the document seen by Reuters shows. The government has not tasked refiners with additional preparations this month, industry sources say. And in any event, there's not much they could do. "If they cut supplies we will be left with no option than to buy from the spot market or from other Middle East suppliers," said a senior official with state-run MRPL, Iran's top India client. To be sure, there's only so much any refiner can do. The gap left by Iran will trigger a frenzy of buying on the spot market for substitute barrels, likely leading the IEA to release

Unlike in 2007, there's not yet much evidence that a significant geopolitical risk premium is being factored into prices. European benchmark Brent crude oil has rallied 4 per cent in the past two days, partly due to accelerating discussion of a Europen boycott as well as Tuesday's unrest in Tehran, during which protesters stormed two British diplomatic compounds. But it is also down 4 per cent since the IAEA's November 8 report. Analysts say that it's impossible to extract any Iran-specific pricing from a host of other recently supportive factors, including new hope to end Europe's debt crisis, strong global distillate demand and upbeat U.S. consumer data. "I don't think there's very much evidence (of an Iran premium)," says Ed Morse, global head of commodities research at Citigroup and a former State Department energy policy adviser. And he does not see an attack as likely: "I think it's a low probability event. Maybe higher than a year ago, but still low." But that is not stopping some from looking ahead. oil prices would likely spike to at least $140 a barrel if Israel attacked Iran, according to the most benign of four scenarios put forward this week by Greg Sharenow, a portfolio manager at bond house PIMCo and a former Goldman Sachs oil trader. He refused to predict a limit for prices under the most extreme "Doomsday" scenario in which disruptions spread beyond Iran and the Straits of Hormuz is blocked. With that in mind, hedge funds are buying cheap options in a punt on an extreme outage. For about $1,500 per contract, a buyer can get the right to deliver a December 2012 futures contract at $150 a barrel; even if prices do not rise that high, the value of the options contract could increase tenfold. The spark of demand for upside price protection this month is an abrupt reversal from most of this year, when the bias was toward puts that would hedge the risk of economic calamity. "The kind of put skew we were seeing in the last three to six months was remarkable with people preparing for disaster - the Planet of the Apes trade, another massive market crash," says Chris Thorpe, executive director of global energy derivatives at INTL FC Stone. "only in the last three or four weeks has there been increased call buying." options remain relatively costly compared to earlier in the year, with implied volatility -- a measure of option cost -- of 43 per cent above this year's average of just below 35 per cent, the CBoE oil volatility index shows. But nonetheless it's clear that for some funds the potential upside of violence in Iran means that interest is increasing. Says Thorpe: "It's at the back of people's minds." REUTERS

CORPORATE CORNER Int’l Women’s Club organises general body meeting

lahore: International Women’s Club organised their general body meeting at Mall of Lahore which was sponsored by Greenvalley Supermarket International Women’s Club, Lahore. The event was sponsored by Greenvalley, a premium supermarket at Mall of Lahore. The event started with an address from Mrs Atika Zafar Cheema, President of International Women’s Club followed by a presentation on Greenvalley. All the members visited Greenvalley store and enjoyed exclusive discounts that were offered. pRESS RELEASE

UAE Consulate General holds National Day celebrations

karachi: UAE’s Consulate General in Karachi held the celebrations to mark the 40th National Day of UAE with an exciting and entertaining evening at H.H. Sheikh Zayed Bin Sultan Compound. Suhail Bin Matar Al-Ketbi (Council General of UAE to Pakistan), Makhdoom Mohammed Amin Fahim (Federal Minster for Commerce), Syed Qaim Ali Shah (Chief Minister of Sindh), Nisar Khuro Speaker Provincial Assembly Sindh, Manzoor Ahmed Waseem (Home Minister of Sindh), and foreign diplomats from other countries were present at the commencement of 40th National Day anniversary of UAE with a cake cutting ceremony. pRESS RELEASE

LSE holds workshop on ‘Anger Management’

lahore: Lahore School of Economics (LSE) hosted its first ever “Anger Management” workshop, organised by the newly born Lahore School Social Awareness Society (LSSAS). The guest speaker for the event was Mr omar Babar, a USA native, Emory University graduate, who is currently working as an asst Professor at FAST. The workshop was attended by a number of students and teachers and highlighted different types of anger, such as “Positive Rage” or courage linking to one’s prestige, “Negative Rage” or the ego factor linking to external threats, along with causes and effective coping strategies for anger; citing real life issues and examples from everyday life. "The Lahore School Social Awareness Society is a great opportunity for students to come together, share their visionary ideas, resolve major problems of our era to bring about progressive social change," said Hiba Asad, President and founder of LS-SAS. pRESS RELEASE

LAHoRE: Senator, prof Khurshid Ahmad and Rector UMT, Dr Hasan Sohaib Myrad award gold medals and degrees to successful graduates. PRESS RELEASE

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Monday, 05 December, 2011

Necessary measures will be taken to further develop the Russian economy, to increase wages and pensions, to reform education and health care, to fight corruption and, finally, to protect our country against external threats

marketS

Russian President, Dmitry Medvedev

weekly review

Political and economic strains cause KSE-100 Index to lose 276 points WoW g

g g

Panic selling ensues at KSE over investors concern 69 advance, 158 decline, 86 remain unchanged of total 313 scrips traded KSE 30 index also registers losses

KSE gains 13 points on White House’s reconciliatory statement 109 advance, 105 decline, 79 remain unchanged of total 293 scrips traded KSE 30 index gains 19.38 points

KSE gains 26 points amid renewed Pak-US tensions 125 advance, 86 decline, 93 remain unchanged of total 304 scrips traded Jahangir Siddique Company, volume leader of the day

KSE gains 24 points backed by oil sector 111 advance, 108 decline, 94 remain unchanged of total 313 scrips traded Investors shrug off ongoing diplomatic tensions in Pak-US ties

g g

LAHoRe

AAHYAN MUMTAZ

oLITICAL strains came to the forefront again as the KSE-100 index lost 101 points (-0.83 per cent WoW). Devoid of investor activity, volumes continued to be low since trading resumed after Eid holidays, with average daily volume coming at 41.5 million shares (-6.0 per cent WoW). The lackluster environment was duly reflected in scarce portfolio investment flowing into or out of the exchange. of these, foreigners and mutual funds were most cautious, selling shares worth $ 1.3 million and $2.3 million respectively. The political situation has seen gradual deterioration since the start of November. With reshuffling in the political hierarchies and resignations of important political personal taking fold, investment climate remained dry as investors preferred to remain watchful. Moreover, technical level talks with the IMF – circling around independent external sector assessments – concluded with Pakistani officials revising their international trade projections downwards. Although this is not expected to have a material effect on macros, the data released on foreign investment in the country was dismal; FDI stood at $340.2 million, down 27.7 per cent YoY.

KSE tumbles as Pak-US ties crumble 64 advance, 156 decline, 100 remain unchanged of total 320 scrips traded KSE-30 index loses 225.05 points

STOCK SPECIFIC ACTIVITY

FORWARD LOOKING EXPECTATIONS

The week started on a negative note for banking companies. According to data released by SBP, non-performing loans rose by PKR 38bln in 3Q2011 – a jump of 6.6 per cent QoQ. This came at a time when the pace of NPL accretion was thought to be slowing down and was accordingly taken as a strict downside by investors, as accordingly reflected in the banking sector reporting negative 3.1 per cent WoW performance. However, this rise in NPLs was not proportionate through all, as public sector banks saw the highest deterioration in asset quality. A beneficiary however, was BAFL, who has reported improving asset quality and upon close inspection was the only bank to have recorded a decline in provisioning for the 3Q2011. In other sectors, FFC saw a considerable decline as investors raised concerns over reversing urea prices now that gas has been restored.

In the coming week, what will be interesting to see is the performance of fertilizer stocks given that they have dominated the volumes in the incumbent week. This is with particular reference to how investors perceive possible urea price drops in the wake of resumed gas supply. In this regard, there is a slight possibility of ENGRo benefiting at the expense of FFC and FATIMA. Another highlight sector is cement and textiles which are expected to be sensitive to external trade news. This all is though assuming a less volatile political scenario as the past week has been anything other than that. Unless calmness on the front is achieved, investors are likely to stay low, resulting in depressed volumes and scarce trading activity during sessions. Again the trend of foreign investors would be essential in this regard, although a reversal in selling sentiments remain unlikely. Support, if any, would be emanating from local investors on the basis of company activity.

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Monday, 05 December, 2011

I always believe that competition makes the market grow and it leads to improved levels of service

analySiS

Sohaib Sheikh, Head of Marketing Wateen Telecom

Banking on Basel – The case of Internal Rating Based approach T

nAWAzISH MIRzA

HE mortgage crisis of 2008 demonstrated the vulnerability of financial intermediaries towards extreme events emanating mainly from fragile risk management practices. Technically, financial intermediation is a pseudo derivative transaction, and banks take both long (loans) and short (deposits) position simultaneously. Therefore, the inherent risks in banking firms are extreme warranting a prudent risk assessment and management. The basic ingredient of risk management for commercial banks – capital adequacy ratio – is based on a regulatory driven standardised approach for calculation of capital adequacy. The standardised approach was proposed by Basel Committee on Banking Supervision as an interim arrangement and banks were expected to develop their own risk assessment systems. However, almost seven years after the second Basel Accord, banks in Pakistan are still relying on the risk weights provided by the central bank to assess and mitigate their overall risk. This standardised approach is seriously flawed with multiple caveats that should be of concern to commercial banks. Primarily, the risk weights assigned under standardised approach for corporate sector are classified into rated (by approved rating agencies) and unrated exposures with different risk weights for investment (low) and speculative (high) grade entities. This must be interesting to note that none of the default in the last decade was detected ex ante by either of the two rating agencies in Pakistan (despite their claims that ratings are forward looking). Adding insult to injury is that some of the defaulted entities were enjoying investment grade status by these agencies, couple of weeks before declaring default and were ex post subsequently downgraded to default. This raises

questions on prudence of risk mitigating practices that are based on such expert opinions. Therefore, if banks develop internal rating based models, they will be in better position to ex ante assess the likelihood of default and provide adequate capital cushion. Similarly, for unrated corporate exposures, banks should allocate 100% risk weight for capital adequacy purpose. In Pakistan less than hundred industrial (excluding instrument ratings) firms have entity ratings as per the website of two local rating agencies. That would imply a 100 per cent capital charge by commercial banks for most of their corporate clients. This could be alarming as banks with credit portfolios skewed towards bad borrowers will be allocating less capital than required, exposing them to high default risk. This could also leads to Moral Hazard as capital charge for all unrated exposures is same, and banks might seek high risk borrowers to earn premium for augmenting their interest rate spread by hiding the risk under the rug. on the

contrary, banks with premium quality unrated borrowers would managing a non-existing risk putting constraints on their capital. An internal rating base model can address these issues by classifying unrated borrowers according to their repayment capacity and consequently assessing appropriate capital for the relevant risks. Lastly, standardised approach provides no benefits for diversification in portfolios which is a conventional tool for risk management. At present, banks are required to allocate risk weights to individual exposures regardless of the situation of their overall portfolio. Again, this might lead to the situation where banks will increase concentration of their portfolios to yield higher spreads, as they find no economic benefit from diversification. It is also important to note that diversification is not only diversifying one particular risk (intra diversification) but also applies to diversify the possible interaction of various risks (intra diversification) as market risk could trigger credit risk and credit risk could ulti-

mately lead to market risk. None of these types of diversification are considered in standardised approach and banks with high concentration and low concentration will be on a similar pitch to allocate capital against contingent risks. The diversification impact is incorporated in Internal Rating Based (IRB) approach by assuming correlation of exposures within the portfolio for credit risk and under advanced management approach for operational risk, while in market risk, all value at risk models (under IRB) account for diversification. Adapting internal rating based approach is beneficial both for commercial banks and the central bank. Commercial banks could have more accurate estimate of their exposures and can hedge only the relevant risk. This will mitigate the excess risk of bad borrowers and will free up capital against good borrowers, which can be used in other ventures. If the inherent risks are mitigated the economic cost of supervision for the central bank would be less and this would lower frictions in the financial system. SBP introduced a road map in 2005 to adopt internal rating based approach by January 2010 but unfortunately later they allowed flexibility for transition to internal models. Given, the risk management benefits from IRB, Commercial Banks should consider developing their internal assessment methodologies and SBP should follow up on adapting Basel II in its essence because otherwise we have seen that “one size fits all” approach is only good tp manage risk in a Gaussian World but could not sustain even a smallest black swan. The author holds a PhD in Quantitative Finance from Paris Dauphine. He is Associate Professor of Finance at Lahore School of Economics and provides consultancy on risk management through Synergistic Financial Advisors.

currency market focuS

Like catching falling knives shahab Jafry

found no particular reason to treat the joint central bank initiative as a departure from the usual euro narrative – somebody placed somewhere high talking up the market every now and then to engineer short, targeted gains in the single currency. If anything, doubts about the Dec8&9 summits pressured the euro down again on Friday, as time to back words with actions drew near. Seen closely, the surprise market rally of last week betrayed more investor desperation than confidence in the troika’s ability to deliver as efforts to save the euro effectively run into overtime. My crystal ball agrees more with Morgan Stanley than BNP Paribas, that rather than some manner of sanity returning to the euro argument, the recent rally provides a fresh position to renew shorts. According to Bloomberg, futures traders

have increased bets the euro will fall against the dollar, with net-short wagers rising the most since June ’10. So, even as the last five trading days marked the euro’s first weekly gain since oct 28, I see little to believe near term strength in the European currency. Its failure to break above the 1.3560 resistance confirmed my hunch that the talk-up would subside as forcefully as it materialised. Remain committed to the 1.30 drop. It shall come. It is actually quite simple to rationalise. one, whether made directly, channeled through IMF or made as a Christmas present by Santa Claus, Europe’s financial firepower is simply insufficient to neuter sovereign debt bombs. Two, fashioning the ECB into an endless lender of last resort will mandate running printing presses overtime, un-bottling inflation expectations and driving Germany even

farther from the rest. Three, this week’s interest rate conclave will only deepen the cleavage as the expected 25bp cut will feed Bundesbank paranoia of inflation. There is already rising unrest in Germany as rising prices threaten to undermine the middle class’ savings, infuriating the biggest vote bank. Four, countries (like Italy, Portugal, Greece) expecting Germany, and the international community, to step up funding will not register meaningful growth as harsh austerity compromises productivity and eventually growth, requiring unending exogenous support. Five, the road to fiscal union will concentrate unprecedented political decision making in Germany, contrary to the original founding intent of the union. No sir, there is no way the euro can survive this crisis unscathed. Best case scenario? Deep, protracted recession. More likely? Unravelling of the single currency. Near

the euro summits and interest rate decisions are the last roll-of-dice by euro zealots. And even if they throw in the kitchen sink, they simply would not have enough funds to forestall imminent falling sovereign dominos

term scenario? Drop to 1.30! Interestingly, Europe’s drama is no longer restricted to the currency market, its fear-and-greed pendulum swinging visibly into the oil market as well. If it hadn’t been for geopolitical uncertainties bidding up crude, oil too would have swung endlessly up and down as emergence and redressal of contagion fears in Europe impacted overall aggregate demand. But so long as Israel threatens attacking Iran, Tehran vows blocking the Straits of Hormuz, Saudis sweat over the shia uprising in the eastern provinces, Libya struggles with regaining Qaddafi era production levels and the Arab spring sprouts Islamist governments, oil will remain elevated. Ditto for oil and commodity currencies. Be prudent, posture for shorts against commodity currencies. Stay away from mainstream market currents till this week puts the risk environment in perspective. The euro summits and interest rate decisions are the last roll-of-dice by euro zealots. And even if they throw in the kitchen sink, they simply would not have enough funds to forestall imminent falling sovereign dominos. Wait till the market prices it in. Till then, trading euro-dollar is like catching falling knives. Comments & queries: jafry.shahab@pakistantoday.com.pk

Commodity prices rally as US dollar slides against euro LonDon

AFp

oMMoDITY prices rallied this week as the US dollar weakened against the euro in reaction to global efforts to tackle an escalating eurozone debt crisis, analysts said. The US dollar won back some ground on Friday as traders booked profits ahead of next week’s EU summit and after official data showed the US unemployment rate dropped to 8.6 percent last month, its lowest level since March 2009. Raw material prices, like equities, were buoyed this week after the central banks of the US, the eurozone, Britain, Japan, Canada and Switzerland cut the cost of providing US dollars to banks, giving more liquidity to financial markets. Commodity prices also won support after China unexpectedly cut its ratio of obligatory bank reserves, in its strongest move yet to ease restrictions on lending. “In the current environment, external markets, attitudes towards risk and views on the global economy are likely to stay in the driver’s seat” as far as commodities are concerned, Barclays Capital analysts said in a note to clients. “This week has seen progress surrounding the eurozone debt crisis ahead of the ... EU summit next week,” they wrote. oIL: Prices rose as the euro rallied against the US dollar. A weaker greenback makes US dollardenominated commodities like oil cheaper for buyers holding stronger currencies, lifting demand and prices of raw materials. Crude futures also rose this week on international tensions over major oil exporter Iran. The EU, piling pressure on Iran after an attack on the British embassy, beefed up sanctions on Thursday over Tehran’s nuclear program and threatened to hit its oil and finances next. By late Friday on London’s Intercontinental Exchange, Brent North Sea crude for delivery next month rose to $108.92 a barrel from $106.11 a week earlier. on the New York Mercantile Exchange, West Texas Intermediate (WTI) or light sweet crude for next month jumped to $100.26 a barrel from $96.06. PRECIoUS METALS: Gold, seen as a safe haven in times of economic uncertainty, led the precious metals complex higher. By late Friday on the London Bullion Market, gold advanced to $1,747 an ounce from $1,688.50 the previous week. Silver jumped to $33.15 an ounce from $31.24. on the London Platinum and Palladium Market, platinum rose to $1,559 an ounce from $1,529. Palladium rallied to $653 an ounce from $572. BASE METALS: Industrial metals prices mainly rallied, with copper gaining 8 percent. By late Friday on the London Metal Exchange, copper for delivery in three months rose to $7,883 a tonne from $7,276 the previous week. Three-month aluminum rose to $2,145 a tonne from $2,004. Three-month lead increased to $2,120 a tonne from $1,994. Three-month tin declined to $19,800 a tonne from $20,600.