PRO 18-10-2012_Layout 1 10/18/2012 2:56 AM Page 1
Thursday, 18 October, 2012
Violence eradicating investment optimism Security unrest keeps foreign investors away from Pakistan KARACHI
F
ISMAIL DILAWAR
ISCAl year 2012-13 is no exception when it comes to the inflow of foreign investment into terrorism-hit Pakistan. According to central bank, during the first three months of FY13, July-September, the troubled country could attract net foreign investment of $ 200 million only. last year too was not that fascinating as the corresponding months in FY12 had seen a meager inflow of $ 217.2 million, registering a decline of 7.9 percent or $ 17.2 million when compared with this year’s figures. The ever worsening security unrest happens to be the major attributing factor for the foreign investors shying away form Pakistan. “Owing to law and order situation and unrest in Pakistan, US companies are often reluctant to come to Pakistan,” James Fluker, senior commercial counsellor at the US Embassy in Islamabad, told the traders and industrialists at Karachi Chamber of Commerce and Industry (KCCI) here Wednesday. The US official said several American firms were in contact with US Overseas Private Investment Corporation (OPIC). His government, in collaboration with private sector, however, had planned to pool a special $ 80 million fund, Pakistan Private Investment Initiative Fund, for assisting the Small and MediumSize Enterprises (SMEs) in Pakistan. To be managed by the USAID, Fluker said funding under the fund was likely to be increased upon working well. The Foreign Direct Investment (FDI) appeared to be the worst affected. Foreign investment under the above head dropped to $ 87.2
Uncle Sam eyes SME sector US government, private sector plan $80m fund for SMEs in Pakistan KARACHI STAFF REPORT
million from last year’s $ 263 million during the months in review. This shows a decrease of $ 176 million or 67 percent over the same period of FY12. According to State Bank, the review period saw $ 287 million FDI inflows against the $ 200 million outflows. The same months in FY12 had marked $ 580 million and $ 317 million flowing in and out of the country, respectively. The portfolio investment, however, was an upset. The private portfolio investment rose by $ 143 million or 305 percent to $ 96.3 million against negative $ 47 million of last year’s corresponding period. The international investment in equity securities from public sector also marked an upsurge of $ 15.5 million or 1354 percent over the same quarter of FY12. During July-Sep FY13 the country’s equity market received portfolio investment worth $ 17 million against $ 1.1 million of the first quarter of FY12. The economic obs e r v e r s believe that the current downward trend in foreign investment was very critical for the resource-constrained country. They said the inflow of international investment was the only permanent factor that could rid the dollar-hungry Pakistan of its balance of payment woes that are ultimately to be addressed through a fresh IMF debt package. Intensified by the post-May 2 diplomatic entente between Washington and Islamabad, the investment climate in the terror-stricken Pakistan has long been non-conducive with a deteriorating law and order and ever-present political instability being the permanent reasons for the negative.
The government and private sector of the United States have planned to pool an initial $ 80 million fund under the Pakistan Private Investment Initiative Fund to be implemented and managed by the USAID. “This Fund would target and assist the SME sector and should be extremely beneficial for it,” said James Fluker, senior commercial counsellor at the US Embassy in Islamabad, during his visit to the Karachi Chamber of Commerce and Industry (KCCI). Accompanied by Jonathan Ward, US economic and commercial consul in Karachi, and Malik Attiq, commercial specialist US commercial service, Fluker said upon working well such funding were likely to be increased. About the law and order situation, the US official said owing to the unrest in Pakistan, the American firms were often reluctant to come to the country. “Several companies are in contact with US Overseas Private Investment Corporation (OPIC),” he said. Fluker said the US Commercial Section had an aim to promote commercial activities, US companies and was working as a trade promotion agency. The US Commercial Service, he said, provides export counselling, promotes US products and services in Pakistan, in addition to counselling and advocating US Commercial interests in the country. Services offered are wide range of trade promotion services to both American as well as Pakistani firms. He said US commercial specialists could help US companies in identifying potential trade opportunities and trade partners by providing valuable market intelligence, potential and qualified business partners, and thus enabling a profitable busi-
ness in Pakistan. Business delegations are composed and trade shows are also organized for business matchmaking and integration. To a query about US single country exhibition in Pakistan, he replied that catalogue show and multimedia presentations could be made. On GSP, he said, 12 items of textiles were included in GSP list, however, US market was open for all Pakistani products and tariffs vary for different products. Earlier exchanging views with Fluker, KCCI president Muhammad Haroon Agar urged Washington to reciprocate Pakistan’s contributions as a frontline state in the global War Against Terror by helping the troubled country address its economic challenges through shifting its support from conventional aid to market access, investment, technology transfer, health, education and training, scientific research, power generation and infrastructural development. Agar articulated that Pakistan’s role in combating terrorism had not been materialized in terms of increased economic cooperation between Pakistan and US. He said American companies in Pakistan were enjoying successful business opportunities while contributing revenue for national exchequer and similarly the said companies also have created thousands of jobs in the country, however he said, these contributions do not reflect the real magnitude and true potential and the exemplary friendship and harmony shared by our two countries. Agar urged the commercial counsellor to motivate US investors to invest in Pakistan because no single multi-national corporation has wrapped up its business from Pakistan and enjoying profitable business successfully. Also attended the meeting were former KCCI presidents Anjum Nisar and Majyd Aziz, Senior Vice President KCCI Shamim Firpo, Vice President Nasir Mehmood and managing committee members.
STRONG CEMENT SECTOR ESSENTIAL FOR STOCK MARKET UPTREND SHAHAb JAfRy Maintaining cement sector strength has become necessary for sustaining the uptrend in the equity market, especially as low growth and erratic input costs cramp the real economy, according to analysts and investors associated with the industry. After oil and gas, cement is the second biggest trading cluster at the KSE, and its strong showing in the last fiscal was central to the Index’s strength in H2-FY12. Mounting political and security threats, coupled with chronically low GDP growth, has left the bourse as the only platform still attracting meaningful foreign investment, something Islamabad would naturally like to see continuing. Yet lately the cement sector has come under increasing scrutiny, with technical traders warning of overbought levels, and producers pointing at election year expansionary compulsions and likelihood of greater export revenue as enough to sustain the uptrend. At stake is not just industry cash flow at a time of unprecedented infrastructural upgradation across leading plants, but also the KSE index itself, which is heavily reliant on just four or five sectors to drive its growth. After months of slowdown, both local cement dispatches and exports picked up in September, by 19.8 and 3.6 per cent respectively, hinting at renewed electionyear demand at home and improved export prospects in Afghan and Indian markets. Yet with capacity utilisation at 68.86 per
cent (that too after a stellar ’12), exports still on a downward year-on-year trajectory, and the local macro environment not favouring growth, questions have arisen about the sector’s ability to sustain last year’s strength.
InPuT cOST AnD buLL-Run The last fiscal saw the industry’s main input cost cut dramatically due to a sharp drop in coal prices. The downtrend continued till the new year’s first fiscal, with prices dropping 20-25 per cent yoy for Q1FY13. “Both production and consumption are falling, while cement end-price increased 30 per cent last year,” says Sarfaraz Abbasi, senior analyst at Summit Capital, Karachi. “Excitement in company scrips owed to reduced input cost, mainly coal, whereas both local demand and export fundamentals remain weak”. Producers, on the other hand, point at the government’s election year spending compulsions as providing sufficient bid in prices through FY-13. “local demand increased nine per cent last year,” according to Waleed Saigol, who sits on Maple leaf Cement’s board of directors. “Now, with the election element, we expect increased demand. However, there is always the risk of knock-on effects of unstable input cost, like fuel, etc”. There is also the possibility of a reversal in international coal prices as Quantitative Easing III (QEIII) and subsequent dollar debasement to spur growth across
the Atlantic is expected to raise commodity prices over coming quarters. Overbought or more upside room? “It’s difficult to accurately speculate on immediate price movement. There are a number of factors that must play out first”, says Faisal Merchant, chief investment officer at National Asset Management Company (namco), a mutual fund that manages approximately Rs900 million in investments. “FY-12 earnings were super solid, prompting producers to invest heavily in capacity utiliastion, further reducing fixed input expenditure. Personally I feel good about holding cement a little longer”. last year’s bull run led to heavy reinvestment by industry majors. DG Khan Cement (DGKC), lucky Cement (lUCK) and Maple leaf Cement (MlCF) have installed waste heat recovery plants and invested in capacity enhancement, making them more cost effective. “Following adjustments we deem necessary to maintain the uptrend, Maple leaf’s replacement value has increased to around $500-600 million,” according to Waleed Saigol. Yet despite these measures, techincals remain unimpressed. “I’ll need to see more to give a convincing buy-and-hold call,” says Mohammad Tahir, technical analyst at First National Equities, a Karachi based brokerage with net capital value exceeding Rs1.3 billion. “It’s tricky, but for the moment technicals hint at overbought levels just around the corner. Failing clear signs of increased
local demand, and sorting out of export related issues, we might see a drop. But if the government and industry come through, there is definitely more upside. Presently, he sees crucial support for DGKC at around 43 (currently around 50). lucky has strong support at 115 (now at 130-131), but failure to rebound will expose it to 90-95 levels. However, Maple leaf (9.25) has very strong support, and possibly a rebound, at 8.5. “The reason is a clear turnaround in its EPS numbers (earnings per share), indicating a management overhaul, and outdoing its contemporaries where numbers matter,” says Hammad Malik, who currently heads First Pakistan Securities ltd, a lahore-based brokerage house. “Whereas EPS trends for most majors have remained more or less the same, Maple leaf seems midway in engineering a text-book turnaround story.”
SbP AcTIOn, SWIng FAcTORS Recent monetary easing came at a good time for the cement sector. The 200bp drop in interest rates over the last fiscal helped reduce the industry’s debt burden, one of the most leveraged. But with incessant government borrowing diluting the easy money, private sector offtake has been minimal because industry remained crowded out, cement being no exception. Buoyed by the rate cut, cement industry profit grew 152 per cent yoy last year, its 114 per cent increase in stock prices out-
performing KSE by 81 per cent. And there are concerns that the stock price is inflated, helped by exogenous influences as opposed to intrinsic demand. There are also concerns of cartel-like behavior, reflected in retail-level price anxiety. “We expected such large profit (brought about by coal price and SBP rate cuts) to lead to price rationalisation at the retail level. But we see no such signs yet,” says a cement contractor, worrying that high prices will eventually lead to demand contraction. “I’m not surprised few people are able to sift through this mess clearly,” continues Hammad. “It’s not very complicated at all once you break it down to bare numbers”. Simply put, the index is trading at record levels, a trend whose continuation is in everybody’s interest. And to sustain these levels, volumes need to pick up, which have been near dry for a good two months running. At such times, favourable corporate results matter more for market pundits than the macro framework. In this regard, it seems cement majors are right up to mark. They undertook a dangerous gambit – heavy reinvestment and deleveraging at peak levels – but it seems it is just such measures that tilt the local bourse. It is these trends that technicals price in, rather than fundamental news. That means there might be some life in cement yet, and by proxy the market, perhaps till after the election. The writer is a financial journalist covering MENA and Pakistan