profitepaper pakistantoday 10th september, 2012

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Monday, 10 September, 2012

EU pushes more moves to stem debt crisis European Union officials pushed on Saturday to accelerate moves to stem the bloc’s long debt crisis as Italian premier Mario Monti warned that economic suffering was fuelling divisive nationalism on the continent CERNOBBIO

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AGENCIES

oNTI had proposed an EU summit in Rome to discuss the rise of anti-European populism, divisions between north and south and nationalistic prejudices that have been fostered by resentment against austerity measures, he told journalists at an economic conference in northern Italy. “old stereotypes and old tensions have reemerged,” Monti said. “There are many manifestations of populism that are aimed at disunity in nearly all the member states.”

Monti’s remarks at a joint news conference with European Council president Herman van Rompuy underlined the urgency of overcoming a crisis that has lasted close to three years.

Van Rompuy said he supported Monti’s idea and favored bringing forward a meeting to foster European integration from its originally scheduled date in late 2014. Michel Barnier, the EU commissioner in charge of financial regulation, called in a Reuters interview at the conference for swift joint oversight of all euro zone banks. Euro zone-wide banking supervision should be introduced by next January, despite German reservations, he said.

That provided a new focal point in the crisis fighting two days after the European Central Bank announced a plan to buy bonds of weak member states to push down their borrowing costs.

EU Economic Affairs Commissioner olli Rehn

told Reuters the conditions underpinning the ECB plan would be based on existing recommendations for countries like Spain and Italy.

Speaking on the sidelines of the same conference on the shores of Lake Como, Rehn appeared to be backing remarks by ECB executive board member Benoit Coeure who said countries applying for bond buying help might not have to make extra budget cuts. The idea of the program was not to “pile more austerity on top of austerity” Couere told France Inter radio, addressing a major concern in Spain and Italy where belttightening programs have aggravated deep recessions.

CENTRALISED BANK SUPERVISION: Barnier said the EU Commission’s banking sector plan envisaged centralized supervision for all 6,000 euro zone lenders, though oversight of some day-to-day matters such as consumer protection would remain with national authorities.

“We know that all banks can cause problems.

For this reason the logic of our proposals and the requests from the euro zone heads of state is to have a credible oversight of each bank in the euro zone,” Barnier said at the gathering of business leaders, politicians and EU officials.

“Germany voiced concerns we can understand. They are the largest (financial) contributor,” he said, but hoped Berlin would support the plan as it favored sound banking oversight.

EU finance ministers are meeting in Cyprus next week to discuss centralized banking supervision. German Finance Minister Wolfgang Chasuble

has said the ECB should only supervise big banks, and expressed doubts the EU can put in place such a mechanism by the January 2013 deadline. But Barnier said on Saturday creating such supervision in just over a year was “necessary and do-able.” ECB President Mario Draghi unveiled plans on Thursday for potentially unlimited purchases of bonds with maturities of up to three years issued by countries that request European aid and fulfill strict domestic policy conditions. Rehn said the conditions would be based on existing country-specific recommendations and “would have to include very specific objectives and a timeline” on meeting them. No countries have yet applied for help from the yield reduction plan, he said. Italian Economy Minister Vittorio Grilli told reporters at the Cernobbio conference that Italy did not plan to sign up, while Spain has said it would discuss conditions attached to the ECB program next week with its euro zone partners but was in no hurry to seek international aid.

Mexico’s outgoing president calls for oil reform VLADIVOSTOK AGENCIES

Mexico’s oil industry is dominated by state monopoly Pemex PEMX.UL and private companies have limited access to the market. The country faces a key test as production has fallen sharply in recent years and Pemex risks becoming a net importer of crude within a decade. Calderon, who will hand over power to President-elect Pena Nieto at the end of the year, called on the new administration to reform and modernise the industry. Nieto has promised “bold steps” to boost outside involvement in oil exploration. “I hope that the new government will have not only the political will but also political support ... to make such an important change in our law and in our constitution,” Calderon told a briefing at an Asia-Pacific Economic Cooperation (APEC) summit in the Russian city of Vladivostok. Pemex, created in 1938 when the country’s oil industry was nationalised, made a new light crude oil find in the Gulf of Mexico in August, which, if confirmed, could provide between 4,000 and 10,000 barrels per day. Mexico’s oil output is currently 2.5 million barrels per day. “Is that enough for the country? I don’t think so,” said Calderon. “I still believe that Mexico requires an important reform in order to allow Pemex to modernise its processes, to modernise its technology, to modernise its know-how, getting the experience of global companies.” To discover new fields and increase output, Mexico should consider allowing Pemex to create joint ventures with foreign companies, acquiring technology and know-how from companies like Norway’s Statoil () and Brazilian Petrobras (), Calderon said. Calderon’s presidential stint ends in December and Nieto, who has pledged a raft of fiscal, labor and energy reforms, will be sworn in on December 1.

Wall Street Week ahead

A nice rally while it lasted At the start of the historically weakest month for equities there are plenty of reasons to believe stocks may be just about reaching a top - at least in the short term NEW YORK AGENCIES

The S&P 500 has surged 14 percent this year and is at its highest level in more than 4 years. Not counting 2009 when equities rebounded from their crisis lows, this could be the best year for stocks since 2003 - nearly a decade.

A report showing hiring in the United States in August was again much slower than expected and warnings of a slowdown at Intel and FedEx this week, which will likely foreshadow a very weak earnings season, have not been enough to

deter investors buoyed by aggressive central bank action.

After the European Central Bank’s pledge to buy the debt of troubled eurozone countries this week the Fed is widely expected to introduce new stimulus measure in the form of more bond buying when it closes its two-day meeting on Thursday. “Good news in good news and bad news is good news, largely because of the Bernanke put,” said Eric Kuby, chief investment officer, North Star Investment Management in Chicago.

The S&P 500 is now trading at 13.3 time its forward earnings estimates,

meaning investors are willing to pay just over $13 for a dollar of expected earnings from S&P 500 companies.

Although that is below a median forward price-to-earnings ratio of 13.7 since 1976 - according to Morgan Stanley - it is close to the upper end of the range in the low-growth post crisis era of the last 5 years. During that time there has been a median price-to-earnings ratio of 12.9, according to Thomson Reuters data.

In fact, the recent price-to-earnings high was 13.5 in February 2011, just above current levels. If you are of the view that little has changed since then, there is no reason for the ratio to go much higher. That combined with a slowing earnings picture inevitably means lower prices. “our view is that the next double digit move in the market is down not up,” said Morgan Stanley in a research note.

The analysts, led by equity strategist Adam Parker, believe the S&P 500 will finish the year at 1,214, 15 percent below where it is now. At current levels the riskreward skew is starting to look less attractive then it did. That is especially true given the uncertainty the November presidential elections are likely to generate, as well as the potential for more slip-ups in Europe.

“We put a 1,450 target on the S&P for year and so I’m encouraged,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. “But I will say, if this trend continues, I’m inclined to declare victory and move to the sidelines (and) start taking profits.”

The average analyst estimate for the S&P 500 this year is 1,383 according to a Reuters poll from the middle of the year.

That shows Ablin is not alone. The S&P’s performance has already outstripped most expectations.

Another negative factor is the rapidly declining earnings outlook for the remainder of the year, as well as for 2013.

Analysts are now expecting a 2.1 percent drop in third quarter earnings year-onyear. About a year ago they were looking for growth of nearly 15 percent.

This week Jonathan Golub, UBS’s chief U.S. equity strategist, cut his S&P 500 earnings outlook due to a weaker U.S. economic outlook, conversion dis-

tortions from a stronger dollar, as well as weaker oil prices.

For 2012 Golub cut his S&P earnings forecast to $102.50 from $103.50 and to $107.00 from $110 for next year.

Golub believes third quarter earnings will be just $25.10, 2 percent below the same period last year. on an annualized basis that would translate into an S&P 500 level of just over 1,300 given a priceto-earnings ratio of 13.

Signs are that those forecasts are already starting to come true. on Tuesday, FedEx Corp (FDX.N), the world’s second-largest package delivery company, cut its profit outlook for the current quarter, saying weakness in the global economy was hurting demand for overnight international shipments.

Three days later, Intel Corp (INTC.o) cut its third-quarter revenue estimate due to a decline in demand for its chips, as customers reduce inventories and businesses buy fewer personal computers. A revision of Intel targets had been expected by some analysts after PC makers Hewlett Packard Co (HPQ.N) and Dell Inc (DELL.o) warned of slow demand last month.

Golub is now talking about an earnings “drought” and even an earnings “recession.” “While investors are focused on monetary policy, we believe these weak earnings results will contain a market advance,” he said in a research note.

Golub has a year end S&P target level of 1,375, 4.3 percent below Friday’s closing level. The latest leg of the rally was a 2 percent surge on Thursday that pushed the S&P 500 to its highest in more than four years and the Nasdaq to its highest in 12 years. The move was courtesy of the European Central Bank and its pledge to act as an unlimited lender of last resort to troubled European nations. But it is not a done deal.

The German constitutional court will rule on Wednesday whether the European Union’s new ESM rescue fund should come into being. If it vetoes it, the ECB’s plans could be left in tatters since its intervention requires a country to seek help from the rescue fund first.

Dutch elections on the same day look

to have been robbed of some of their potential drama, with the hard-left socialists now slipping in the polls. Instead, the fiscally conservative Liberals are set to win most seats with the center-left Labour party also polling strongly.

But there are no guarantees and Germany could yet be robbed of one of its staunchest pro-austerity allies in the debt crisis debate. “While we got some monetary solutions we still need more answers (on) the underlying European economy,” said Ablin. “I don’t think bond buying solves the euro crisis.” Europe is not the only concern for investors. A slew of Chinese data on Sunday will provide an insight into how the world’s second economy is faring amid concerns of a slowdown. The data includes inflation, retail sales and industrial production.

The Baltic Exchange’s main sea freight index .BADI, which tracks rates for ships carrying dry commodities, fell for the eighth straight session on Friday.

Some of the weakness is blamed on collapsing iron ore demand from China.

Shipments of iron ore account for about a third of sea-borne volumes. Spot iron ore prices just hit their weakest in nearly three years, extending a market rout that began in July, while Poor demand drove Shanghai steel futures to a record low this past week.

But even with the less than stellar fundamental picture, the old saying ‘don’t fight the Fed’ has proven to be true once again. The chances of the Federal Reserve embarking on another round of bond purchases next week have jumped after the disappointing August U.S. employment numbers on Friday, according to a Reuters poll of economists.

The median of forecasts from 59 economists gave a 60 percent chance the Fed will announce another round of quantitative easing, or QE3, on Thursday.

For the last 40 years the MSCI world index .MSCIWo has lost 0.9 percent on average in September, making it the worst performing month for the stock market, according to data from Thomson Reuters. So far the index, a broad measure of global equities, is up 2.6 percent this month.

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Business 02 Resolving Pakistan’s debt crisis

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ZAIN KHAN

S Pakistan pays IMF the third installment of $ 107.6 million of the Stand-By-Arrangement, the sustainability of its debt raises fresh concerns. The global financial crisis, sovereign debt crisis and balance sheet crisis have ravaged the global economy. Pakistan has also been caught in the meltdown and is facing acute problems of a twin deficit, unsustainable public debt, massive fiscal imbalances, unemployment, erosion of incomes, liquidity crunch, squeezing fiscal space, and drying up investments. Pakistan has to resort to external and internal borrowing to bridge the twin deficits and to fill the financing gap.

Pakistan’s debt-to-GDP ratio is close to 60%.

Its debt liabilities crossed Rs. 12 trillion in 2011, resulting in debt servicing (including interest payments) to the tune of 43.7% of the government revenue. Rising debt is a drag on macroeconomic stability, growth and development. It is also a major source of fiscal and current account deficits, thus aggravating the fiscal crisis which is reflected in such further complications as pressure on the exchange rate (widespread exchange losses in public debt portfolio) and diminishing private sector investment. Higher indebtedness also translates into low credit rating by credit rating agencies which in turn discourages FDI and foreign portfolio investment.

Higher debt-to-GDP ratios suppress output, private consumption and government spending on public goods such that welfare costs increase with every incremental increase in debt.

Pakistan is experiencing a linear increase in debt. With high debts, interest payments also increase, thus increasing both debt servicing and interest payment burden. Hence, higher debt levels make stabilization more costly and induce shirking by governments. Previously, our debt had a higher dollar component while now rupee component has increased rapidly due to internal/ bank borrowing. The ‘local’ component has implications for the budget whereas the ‘foreign’ debt component affects the balance of payments equation, although that part is known to be used for budgetary support as well. Due to increasing debt stock, the medium term outlook for Pakistan is quite bleak.

IMF’s country report No. 12/35 of February 2012 reflects stagnation in country’s debt situation, with budget deficit close to 7%. External debt is projected to be at 70.3 billion in 2014-15. Economists argue that debt (both internal and external) has a negative relation with growth. This debt is a result of structural weaknesses within the economy and the external account.

The large accumulation of debt has been due to heavy tilt towards public debt increasing by Rs. 6,924 billion in four years, against only Rs. 1,784 billion in the 7 years period. our total public debt liability accumulated during 60 years was Rs. 4,802 billion, to which Rs. 6,924 billion were added in only four years, taking the total to Rs. 11,726 billion. External debt and liabilities also increased by app. $20 billion in four years against an increase of only $1.6 billion in the previous seven years. our domestic debt was only Rs. 2,600 billion in 2007-08, which increased to Rs. 6,864 billion by end 2011. Similarly, the foreign currency denominated debt has increased to Rs. 4,861 billion from Rs. 2,201 billion during the same period, taking the total public debt liability from Rs. 4,802 billion in 2007-08 to Rs. 11,726 billion by end 2011. Exchange rate depreciation has contributed substantially to the spike in debt, as the value of rupee plummeted from Rs. 60.6 per $ to almost Rs. 100 per $ as of now.

Pakistan has been almost continuously under an IMF program for over two decades. The IMF is supposed only to make funding temporarily available for emergency relief and not for economic distress due to un-payable debt. IFIs are pressing for fiscal tightening instead of debt relief. Pakistan needs a viable and successful exit strategy from the debt trap. The strategy has to work on several parameters. The foremost requirement is a focus on macroeconomic stabilization with a close attention to fundamentals, including a resolve to reduce the twin budget and current account deficits through tight fiscal discipline and consolidation. Any further borrowing should be strictly need based with a strict eye on the interest rate, maturity period, amortization payments and currency fluctuations. Exchange rate volatility, uncompetitive devaluations and instability of domestic financial markets together act to discourage the lenders from extending loans in times when weaker economies require

greater liquidity through capital injections. The debt management strategic has to be a mix of rescheduling, strict adherence to the Debt Limitation and Fiscal Responsibility Act, fiscal consolidation, and seeking debt at concessional rates as well as a possibility of debt swaps (e.g. debt relief through Paris Club – I, II & III in pursuance of Paris Club Agreement of 2001 when Pakistan’s entire debt was rescheduled on the basis of an extended repayment period). only such loans should be negotiated which have a lower cost of borrowing, with a room for rescheduling and improving the maturity profile. our policy makers should seriously pursue the route of debt restructuring, like the Paris Club restructuring. Debt accumulation is basically associated with a lack of regard to the Debt Limitation & Fiscal Responsibility Act. The government should also set for itself debt reduction targets.

The government needs an effective debt management policy whereby debt obligations are assessed on a five to ten year horizon. Short term macroeconomic stabilization tools include the use of monetary policy to control short-term nominal interest rate, fiscal policy to regulate spending decisions on public goods, and decisions related to financing public expenditure either by raising revenue through taxes or incurring debt. Not cutting government spending leads to further increase in debt, high debt servicing and interest payments. Higher debt level necessitates higher taxes. If a fiscal policy curtails expenditure but at the same time does not increase tax collection, the effects of a recessionary shock linger longer than the shock itself because governments are tempted to use inter-temporal margins for further fiscal consolidation. Some governments, while reducing expenditure also reduce income tax collection to decrease the impact of economic shocks on households, which is unsustainable in the long run. This is paradoxical because by not to raising taxes the government keeps the deficit high as before.

More importantly, in the wake of the 18th amendment, the provinces can raise their own debt. This has the downside of public debt accumulation at the sub- national level. It is most likely that the provinces will follow the federal government route of resorting to bank borrowing which has to be discouraged at all costs.

CORPORATE CORNER LG to showcase variety of leading audio and video products

LAHORE: LG Electronics (LG) is set to show off a variety of audio and video products at this year’s IFA tradeshow in Berlin. Following the strategy that gave LG leadership in the 3D TV market, LG is aiming to lead the global audio visual market with its strength not only in 3D and Smart TVs, but also in enhanced smart de-vice compatibility and innovative design. PRESS RELEASE

Thunderstorm and heavy showers play havoc PESHAWAR: Federal Minister for Communications Dr. Arbab Alamgir Khan Khalil rushed to his home constituency in Peshawar and expressed his deepest sorrow over the death of three persons due to the roof collapse in Charkha Khel Peshawar. PRESS RELEASE

ZONG launches Student Package LAHORE: Keeping pace with the ever changing needs and wants of today’s youth, ZoNG – the fastest growing network of Pakistan is introducing a brand new offer called Student Package for its young subscribers. The package will entail 3 more tariff plans named Talkie, All Rounder and Texter which are targeted at meeting the varying demands of youngsters according to their personalities. PRESS RELEASE

Merkel defends ECB after German outcry Chancellor Angela Merkel defended the European Central Bank after its plan to buy the debt of troubled euro zone states stirred outrage in Germany and threats from some in her own party to try and block the scheme BERLIN AGENCIES

ECB President Mario Draghi unveiled plans on Thursday for potentially unlimited purchases of bonds of up to three years maturity issued by countries that request a European bailout and fulfill strict domestic policy conditions.

The German central bank chief was the sole dissenting voice in the decision.

Merkel’s center-right coalition remains broadly behind her stance of backing help for vulnerable states such as Spain and Italy in return for tough reforms of their national finances. But the outcry from a small but vocal eurosceptic minority among her own parliamentary supporters and from influential conservative media underlined the political risks as the euro crisis builds ahead of a general election due a year from now.

“The ECB is an independent and very strong institution,” Merkel told rep-orters in Vienna, stressing that help would come with strings attached in her first public comments on the plans. “Conditionality is a very important point. Control and help, or control and conditions, go hand in hand,” she said.

But many German conservatives share the concern of Jens Weidmann, head of the Bundesbank, that the bond-buying plans violate a taboo on financing state deficits, remove pressure on governments to reform and will eventually stoke inflation.

“Blank cheque for the indebted states,” was the headline of the top-selling Bild newspaper, a harsh, populist critic of the bailouts for Greece and o t h e r struggling e u r o zone nations,

adding that the ECB move could render the euro “kaput”.

An opinion poll released on Thursday before the bond-buying plan was announced showed nearly one German in two has little or no confidence in Draghi, who is Italian.

Several lawmakers vowed legal action to block the plans. “We should consider making legal checks on whether the ECB has hugely overstepped its mandate. I am convinced that this is the case,” Klaus-Peter Willsch, a leading eurosceptic member of Merkel’s Christian Democratic Union (CDU), told German radio. “As the largest creditor nation in the whole game, Germany should have a right of veto,” he added.

BUNDESBANK ISOLATED: Weidmann was isolated in Thursday’s meeting of the ECB Governing Council, where mighty Germany, with 82 million people and Europe’s biggest economy, has just one vote, the same as tiny Malta.

In a critical statement, the Bundesbank said the decision was “tantamount to financing governments by printing banknotes”.

Investors cheered the ECB rescue plan, with the euro and stocks rising worldwide and the borrowing costs of Spain and Italy tumbling. But Die Welt, a conservative German daily, headlined the market reaction bitterly: “Financial markets cheer the death of the Bundesbank.”

Frank Schaeffler, from Merkel’s junior coalition partners the Free Democrats (FDP), said Germany should file a lawsuit with the European Court of Justice, saying the ECB was in danger of turning into a “bad bank

for all the junk debt of Europe”.

Markus Soeder, finance minister in Bavaria and a member of the Christian Social Union, sister party to Merkel’s CDU in the state, called for an overhaul of the ECB’s voting structure, with votes weighted according to a country’s size. “Up to now the ECB was a sort of European Bundesbank. Now it is turning into an inflation bank,” he told the Muenchener Merkur newspaper.

More worryingly for Merkel, figures closer to the mainstream expressed at least sympathy for those mulling legal action.

The CDU state premier of Saxony, Stanislaw Tillich, told Die Welt: “As far as I know the European treaties, this measure should be legally scrutinized.”

Rainer Bruederle, the leader of the FDP group in parliament, described Draghi’s plans as “borderline” and said it was no surprise they had produced “mixed emotions” in Germany.

Speaking in Stockholm on Friday, German Finance Minister Wolfgang Schaeuble contradicted Weidmann, saying the bond buying plans did not mark the start of monetary financing of sovereign debt. He dismissed the media outcry as exaggerated.

But lawmakers are keeping a nervous eye on opinion polls that show rising public opposition to bailouts in Germany, where fear of hyper-inflation is engrained in the national psyche. The collapse of the currency in the aftermath of World War one is seen by many as contributing to the rise of Nazism.

A poll on the website of Der Spiegel magazine showed 54 percent of Germans want the Constitutional Court to block the euro zone’s, separate, permanent rescue fund next Wednesday when it announces a verdict that is nervously awaited by investors.

Legal experts polled by Reuters expect the court to approve the ESM but set conditions limiting Berlin’s future flexibility.

A study by R+V Insurance released on Thursday showed 73 percent of Germans fear the costs to taxpayers of the euro debt crisis and 65 percent see the continued existence of the common currency under threat.

Benazir Income Support Programme, Chairperson, Farzana Raja talking to ADB country director Werner Liepach.

Pakistan State Oil, CEO & Managing Director, Mr Naeem Y. Mir distributing gifts amongst the garage school’s children on the occasion of world Literacy Day.

Samsung Pakistan Business Manager HHP Mr. Roy Chang and Samsung Pakistan & Afghanistan Business Head HHP Mr. Farid Ullah Jan presenting the grand cash prize to Mr. Shahzad Aslam, winner of the ‘EID BANAO SMART’ promotion.

Monday, 10 September, 2012