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State capitalism in the global financial market Page 03
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profit.com.pk
Monday, 23 January, 2012
Government loses $12 billion in volumes-starved capital market KARACHI
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ISMAIL DILAWAR
OverNMeNT of Pakistan incurred a huge financial loss of $12 billion, more than the dollar-hungry country receives annually on account of worker remittances, in the country’s volumes-starved capital market during last four years. The country’s capital market is transiting through one of the most difficult phases mainly because of the prevailing serious liquidity crunch
and extremely low level of investors’ confidence, thanks to the 2008 market crash and the imposition of illthought-out levies like the Capital Gains Tax (CGT). according to Chairman Securities and exchange Commission of Pakistan (SeCP) Muhammad ali, the above factors had eventuated into decreased market volumes and the market capitalisation currently had dropped to $33 billion from $75 billion of the peak time four years ago. “Government of Pakistan owns 30 per cent of this market capitalisation
which means the loss to the government due to the issues faced by capital market is $12 billion (one trillion in rupee terms),” SeCP chairman told a ceremony held Saturday at Karachi Stock exchange on “Serving Investors and Industry” in the presence of Federal Finance Minister dr abdul Hafeez Sheikh. SeCP chief said in the backdrop of 2008 liquidity crisis and the imposition of CGT, the current turnover at the country’s bourses was less than 10 per cent of what it was six years ago. “New listings from good
‘Economy to grow 4pc by end-FY12’
KARACHI
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ISMAIL DILAWAR
ederal finance minister dr abdul Hafeez Sheikh Saturday said the country’s troubled economy would end up in a “manageable” position and is expected to grow by four per cent by the end of current fiscal year, FY2011-12. “We would be uncomfortable but in a manageable position (at the end of the year),” the finance minister told a ceremony at Karachi Stock exchange while giving an account of economic opportunities and challenges the country was facing at this mid-term point. The finance minister also brushed aside the impression that Pakistan was “dependent” on a powerful country or institution for its economic survival saying not a single penny had been borrowed from IMF since 2010. ”Nor we received a considerable amount from a big power that could impact us effectively,” he asserted. Further, the minister said taking austerity measures so far his government had succeeded in restricting its budgetary expenditures at 45 per cent against the allocated 50 per cent to avoid loans. On tax front, he lamented Pakistani nation, as a taxpayer and tax collector, had failed to do well thus plunging the country’s tax-to-GdP ratio to the lowest level of nine per cent. The finance minister, however, was
happy to declare that during the first half, July-december FY12, the Federal Board of revenue’s (FBr) tax collection had increased by 27 per cent to rs840 billion. last year the growth in tax collection was 17 per cent. even if it increases at a pace of 27 per cent, the country’s tax collection seems unlikely to meet the government’s target amounting to rs1952 billion, registering a 25 per cent raise compared to FY11. On the current account front, the minister said the country’s exports had grown by four per cent during Julydecember of FY12, which was “good under the circumstances”. last year, he said, the exports had registered an unprecedented boost of 25 per cent to stand at $25 billion. Worker remittances, dr Hafeez, said was another comforting factor that had so far impressively kept the pace of $1 billion per month. “Our foreign exchange reserves are near $17 billion and we are trying to achieve our budgetary targets,” he added. Terming the unique prevailing global economic uncertainties, energy crisis and security situation as major challenges for the country, dr Hafeez said “our basic numbers give us the comfort that we are not heading towards a crisis.” about the annual debt repayment of $1.2 billion to IMF, he said these were budgeted amounts and not new things as being reported. “all these things are budgeted and reflect part of the economic forecast,” he said.
quality corporates are finding it difficult to get fully subscribed,” he told the gathering. He urged the need for certain immediate and long-term reformbased measures to revive the capital market. “The immediate steps needed to save our capital market from complete collapse are resolution of the issues of investor confidence, liquidity crunch and brokers’ capacity to do business,” he proposed. The regulator has proposed a CGT collection mechanism on the clearing agent level, accompanied by a 3
month grace period, reduction in WHT rate and relaxation with respect to source of income information in the filing of income tax returns. Further, The GoP has decided to adjust circular debt worth PKr 150b through issuance of TFCs. reportedly, banks have agreed to subscribe to these issues which, in turn, is likely to provide relief to the energy and banking sectors by freeing up stuck loans of the energy companies into TFCs thus enabling restart of income stream for banks while providing them capital allocation benefits.
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Monday, 23 January, 2012
news
weekly review
KSE-100 witnessed the highest weekly gain in 146 weeks g
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Bulls throng ksE despite political instability oGdc, the performer of the day 116 advance, 86 decline and 104 remain unchanged of total 306 scrips traded
KARACHI
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STAff RepoRT
He KSe-100 index rallied 6.9 per cent during the week, highest since april 03, 2009 (146 week high). Investor interest is also vindicated by 209per cent WoW improvement in average volumes to 87m shares. However,
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Blue chip stocks provide much needed impetus to bourse Engro corp, the volume leader 141 advance, 90 decline, 92 remain unchanged of total 321 scrips traded
foreigners remained net sellers, offloading shares worth $3.7m. Positive expectations related to Capital Gain Tax (CGT) issue ruled the market sentiment, while continuing global economic crisis and uncertain domestic political environment failed to dampen the investor confidence. Moreover, the circular debt adjustment worth rs150b through issuance of Term
LAHORE
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AAHYAN MUMTAZ
He KSe-100 index rallied 750 points (+6.9 per cent WoW) which is the highest since april 03, 2009 (146 week high). Investor interest also saw rocketing recovery of 209 per cent WoW in terms of av. daily volumes which stood at 87m shares. This respite is attributed to positive expectations regarding the regulator’s move to ease CGT requirements, along with a circular debt adjustment on the back of news flows regarding PKr 150b worth TFC issues. However, foreigners remained net sellers of USd 3.7m worth of equities while the impetus was mainly provided by mutual funds and retail investors. The news regarding the proposals sent by SeCP to the Ministry of Finance pertaining to CGT, WHT and disclosure of the source of income created positive investor sentiment. The regulator has proposed a CGT collection mechanism on the clearing agent level, accompanied by a 3 month grace period, reduction in WHT rate and relaxation with respect to source of income information in the filing of income tax returns. Further, The GoP has decided to adjust circular debt worth PKr 150b through issuance of TFCs. reportedly, banks have agreed to subscribe to these issues which, in turn, is likely to provide relief to the energy and banking sectors by freeing up stuck loans of the energy companies into TFCs thus enabling restart of income stream for banks while providing them capital allocation benefits. Moreover, on the political front, confirmation that the hearing of the memogate case will be held next week provided further confidence.
raging bulls storm ksE with 242 point gain oGdc, the star performer 158 advance, 69 decline, 116 remain unchanged of total 343 scrips traded
Finance Certificates (TFCs) and the raid by Competition Commission of Pakistan (CCP) at all Pakistan Cement Manufacturers association (aPCMa) office were the major highlights of the week. The bulls linked wiTh CGT: The news regarding the proposals sent by SeCP to the Ministry of Finance pertaining to CGT, WHT and disclosure of the source of income
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ksE gains 259 points as trade volumes hit record high 185 scrips advance, 69 decline and 86 remain unchanged
ksE sheds 32 pts on institutional profit-taking ksE-30 loses 40.28 points to close at 10,600.95 123 advance, 113 decline and 91 remain unchanged of total 327 scrips traded
created positive investor sentiment. Moreover, the announcement in the KSe regarding the visit of Hafeez Sheikh on the last trading day also provided impetus to the market as he is expected to announce some major changes to the CGT regime. TFC issue To adjusT CirCular debT: The government has decided to adjust circular debt
worth rs150b through issuance of TFCs. reportedly, the banks have agreed to subscribe to these issues that is likely to provide relief to the energy and banking sectors by converting loans of the energy companies into TFCs. despite this news, Banking and electricity sectors underperformed the market by 2.8per cent and 3.6per cent respectively.
stock spEciFic activity
Forward LookinG ExpEctations
The market witnessed strong buying spree in all the major sectors and stocks. In Fertilizer sector, eNGrO, FFBl and FFC were up by 10.5 per cent, 10.4 per cent and 6.2 per cent respectively mainly on the back of healthy results expected to be announced at the end of this month, however, FaTIMa declined by 1.6 per cent. Oil & Gas and the Power sector witnessed improvements of 8.8per cent and 5.7 per cent respectively, on the back of circular debt relief. OGdC was up 11.0 per cent, PPl up 7.4 per cent, POl was up 5.6 per cent and PSO was up 6per cent. However, this performance was not replicated by the banking sector, which underperformed the KSe-100 index by 2.8 per cent, as investors chose to remain cautious preceeding the announcement of results in the next week.
The market is expected to remain positive with healthy volumes where corporate results, the outcome of the memogate hearing and the visit of SeCP Chairman and Finance Minister to the KSe – implying developments on the CGT front – would drive market sentiment. In this regard, banking sector scrips are expected to be in the limelight with MCB, UBl, and aBl being top picks. Support from local institutions is expected to continue where investors would opt for selective buying strong scrips offering attractive valuations. While the element of profit taking cannot be ruled out following the impressive showing in the outgoing week, fertilizer stocks are expected to continue their strong performance trend.
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Monday, 23 January, 2012
news
State capitalism in the global financial market S
SHAn SAEED
OvereIGN wealth arms of the state government are becoming huge with surplus cash and moving the financial markets at their own pace. This player will create new opportunities, wealth generation, shaking the depressed markets, investment in new ideas and above all take control of the markets with full force and strict discipline. It could be ruthless at times. Sovereign wealth investment decisions are framed at government level taking into account the geo-political, strategic and economic position of the country. decisions of UBS chairman to step down after annual meeting in Singapore last year and forcing NIB president in Pakistan to write down his resignation last month are few good examples of the state capitalism. I repeat from one of my previous articles, financial markets and democratic governments are not incompatible. The role of the financial market is to allocate resources to those most capable of using them, while spreading the risk to those most capable of bearing them. State capitalism will drive the markets efficiently with huge funds. although I strongly believe that markets are semi-efficient. biG players in sovereiGn wealTh indusTry 1. China’s China Investment Corporation—CIC 2. Uae’s abu dhabi Investment authority ——-adIa 3. Qatar’s Qatar Investment authority—-QIa 4. Kuwait’s Kuwait Investment Funds—-KIF 5. Singapore’s Temasek Holdings 6. Saudi arabia, Bahrain, russia, Brazil sTraTeGiC role oF sovereiGn wealTh and GovernmenT’s supporT: In the last 4-years, big banks like Bank of america, Merrill lynch, Bear Stearns, Barclays, and BIG governments have been rushing to
these sovereign funds to rescue their default institutions, to save political governments, to invest in strategic resources with promise of guarantee returns to make attractive for them. I have been closely following CIC of China which has been very active in making strategic investment globally to support various projects. CIC started with $200 billion in 2006, increased to $500 billion to date. It is a huge player in the financial market with investment in africa, South america, asia Pacific, North america and europe. I still remember attending a networking event in Singapore in November 2009, where one of the participants shared interesting insight. CIC made investment in 2009 amounting to $117 billion globally in natural resources like coal, natural gas, oil, copper. The whole world was losing wealth and Chinese sovereign wealth fund CIC was making profit with return on investment about 78%. This was quite remarkable taking into account that global economy was imbedded in recession while Chinese were making profit. This point was further validated by Financial Times article in Feb-2010 in which it highlighted the significant achievement of CIC in
the volatile market with strategic economic and investment insight. winners oF sovereiGn wealTh Funds from 2009 to 2011: Clearly there are only few winners in this race who are making headlines in the global financial market including CIC of China, Tamasek Holdings of Singapore, adIa of Uae and Qatar Investment authority. These funds have made some strategic investments globally with profit horizon much higher than many huge corporations with professional management and enhance business intelligence of the markets. I have very high regards and respect for Tamasek of Singapore for their prescience and strategic approach towards investment. invesTmenT amounT oF swF: $387 billion number of Countries: 87 investment deals: 129 industry investment: agriculture, base metals, oil, shale gas, financial institutions, chemical, car, nuclear energy, construction, hotels, precious metals, social networking, infrastructure and renewable energy Continents covered: 5 rate of return: 7-8% [expected return] sources: World Bank, Financial
Times, IMF, Bloomberg, CNN, economist magazine, Business week, Times, Newsweek. eIU report, Wall Street Journal, Herald Tribune FinanCial markeTs and sTaTe CapiTalism: Financial markets would have huge impact through state capitalism or sovereign wealth funds. Banks, corporations, governments would swim or sink depending on the strategic insight of the SWF or decision of the state government if they want stakes in that particular company. SWF would eye on natural resources globally going forward so as to keep its competitive edge over other countries. I feel that state capitalism would be very active in their investment in the following areas I) agriculture or food items II) energy sources like Oil, shale gas, natural gas III) Infra-structure—-local and global Iv) Trade—financial institutions v) Metals—precious and base vI) Health care—-hospitals State capitalism would make strategic investment because of political maneuvering and global economic dominance i.e. i) economic and political harmony ii) Sustainable GdP iii) Food security for people iv) Trajectory for economic growth. The above points clearly illustrate that the SWF could be beneficial for many countries; regions; areas and people for their economic growth. They will make investment that will enhance the economic activity of the nation, build infra-structure, increase human productivity, living standards, alleviate poverty and support income of the people. Shan Saeed is a financial market economist with 12 years of solid global market experience based in Asia Pacific. He has graduated from Uni of Chicago, Booth School of Business, USA and IBA Karachi. He can be reached out at saeedshan@gmail.com. Blogs at www.economistshan.blogspot.com
Indexation of loans and Shari’a riba is defined as the amount of differential in a transaction in which unequal quantities of something are exchanged between two parties HumAyOn DAR
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aNY laymen and Muslim scholars opine that repayment of loans must be adjusted to reflect decrease in value of loans in inflationary environments. according to this view, an interest-free loan of rs1,000 for one year has a value less than rs1,000 if the inflation has a positive rate in the country. Thus, for example, if inflation rate is 10%, then someone lending rs1,000 to another person for no interest will receive rs1,000 at the end of the year, which will have a real value of only rs900. Therefore, the advocates of indexation of loans, suggest that it is only fair that the lender must receive the real value of its loan back, and that the additional money (over and above rs1,000) should not fall under the prohibited interest, as long as the value of the total amount received by the lender does not exceed the value of the amount lent. This is, however, a flawed argument, for the reasons delineated below. There are a Few shari’a ConCepTs ThaT are rele-
vanT here: First, the prohibition of riba (or interest). riba is defined as the amount of differential in a transaction in which unequal quantities of something are exchanged between two parties. The prohibited riba is involved in trade transactions, loans and debt-based arrangements. Thus, if someone lends 40 kilograms of wheat to someone today in exchange for 50 kilograms of wheat after six months, this transaction definitely involves riba, even if someone argues that the price of 40 kilograms of wheat today will be equal to the price of 50 kilograms of wheat after six months. Shari’a principle is very simple. “Whatever you give, receive it back in equal quantity.” If you receive more, it is riba. Period. Indexation of loans is necessarily a concept related with value. value, however, is not a subject matter of riba. loans in shari’a cannot be valued in terms of something other than what is lent. Thus 40 kilograms of wheat today cannot be more or less in value than 40 kilograms of wheat after some time. In other words, it is the intrinsic value that counts not value of something in terms of another item.
Second relevant concept is the time value of money. Time value of money necessarily implies that one rupee at hand is of more value than one rupee after one year. Therefore, proponents of indexation of loans claim that someone lending one rupee for one year must receive more than one rupee after one year. This concept is not acceptable in Islam. Shari’a principle is simple. If someone had kept one rupee with themselves (saved in a locker), it would not have increased in quantity just by act of saving it. It could increase in value only if it was put to a productive use, like investing in a venture or used in trading etc. In such a case, nevertheless, it is also likely that the person might lose the one rupee (fully or partially) in the investment process. Therefore, Islamic recommends profit loss sharing in business transactions between the one who provides money and another one who manages the business. Third, the opportunity cost is accepted in Islam as an economic concept for pre-evaluation of business opportunities and not for valuation of loans. There is clear prohibition in the
Quran of default penalty and charging more for the loss of income arising from a borrower’s default. While there is a room for compensating the lender for the actual loss incurred to recover the debt, Islam does not allow charging for the opportunity cost of not receiving the debt in time. Fourth, transactional justice is very important in an Islamic theory of exchange. The transactional justice is actually the basis of the prohibition of riba. In order to ensure that no party to a transaction is treated unjustly, Islamic theory of exchange relies on numbers, quantities and amounts (which can be objectively defined) as opposed to value (which is more subjective in its nature). Given the above discussion, indexation of loans is not acceptable in Islam, i.e., it is not permissible for someone to charge the principal sum plus an additional amount based on the rate of inflation or a formula derived from an exchange rate of currencies etc. Periodic increase in wages of employees based on an index like Consumer Price Index, or a similar index, does not fall under the argument above.
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CORPORATE CORNER Faysal bank granted authorised derivatives dealer status karaChi: Faysal Bank limited recently announced that they have been granted the status to be an authorised derivatives dealer by the State Bank of Pakistan, after which they are now the sixth bank to have this status in the Pakistan banking industry. In a statement to the press, the President and CeO, Mr. Naved a. Khan commented: “We are honoured to be among the six banks in Pakistan to have been given this status by the State Bank of Pakistan. This will further allow us to offer our clients structured derivatives solutions, thereby addressing their financial needs and providing excellence in service.” an authorised derivatives dealer is a status that is given to a Financial Institution by SBP to carry out derivatives Business. The basic purpose of permitting banks to undertake derivatives is to enable the market participants and/or Corporates to hedge their balance sheet exposures in the financial markets. pReSS ReLeASe
wazir khoja congratulates pakistan cricket team karaChi: “It was surely an inning defeat narrowly escaped by england,” Mr. Wazir ali Khoja Senior member of the Board of Governors’ of PCB & Chairman/Md NIT said in a statement today. Congratulating the Pakistani Cricket team Mr. Khoja said that through a stunning performance Pakistan’s team magnificently outperformed the english cricket team in all departments of the game. Pakistan defeated england by 10 wickets in the first test match, ended at dubai, just in three days. He termed the performance of players in all departments of game as “Stunning” specially the superb bowling of Saeed ajmal who took ten wickets in both innings. pReSS ReLeASe
the 11th ssE advisory Board Meeting held at LUMs
lahore: The lUMS School of Science and engineering (SSe) held its 11th annual advisory Board Meeting from January 16 – 19, 2012. The SSe advisory Board comprises of distinguished academic and corporate leaders who provide counsel to the Board of Trustees, the vice Chancellor and the dean pertaining to the academic and administrative matters of SSe. This year the visiting aB members included dr. richard larson (MIT), dr. robert Jaffe (MIT), dr. Steve Berry (University of Chicago), dr. Khalid aziz (Stanford University), dr. Mehmood Khan (Pepsi Co), dr. Hubertus von dewitz (Siemens) and dr. ashok Mittal (IIT Kanpur). also in attendance at the meeting were the lUMS Management Committee, dr. adil Najam (vice Chancellor, lUMS), dr. Sohail Qureshi (dean, SSe) and members of the SSe faculty. an over view of the school’s progress and constraints provided during the meeting enabled the advisory Board to make suggestions that can contribute to the growth of the SSe. pReSS ReLeASe
HBL declare second interim dividend for year ending June 30, 2012 karaChi: The Board of directors of HBl asset Management limited, the Management Company of HBl Income Fund, HBl Money Market Fund and HBl Islamic Money Market Fund, in its meeting held on January 20, 2012 announced second interim dividend in the form of bonus Units for ‘a’ and ‘B’ Classes of Units and Cash dividend for ‘C’ Class Units for the year ending June 30, 2012. hbl inCome Fund: The Board has approved second interim dividend at rs. 2.5 per unit in the form of Bonus Units for ‘a’ & ‘B’ Classes of Units and Cash dividend of rs. 2.5 per unit for Class ‘C’ Units for the year ending June 30, 2012. hbl money markeT Fund: The Board has approved second interim dividend at rs.2.75 per unit in the form of Bonus Units for ‘a’ & ‘B’ Classes of Units and Cash dividend of rs. 2.75 per unit for Class ‘C’ Units for the year ending June 30, 2012. hbl islamiC money markeT Fund: The Board has approved second interim dividend at rs. 2.25 per unit in the form of Bonus Units for ‘a’ & ‘B’ Classes of Units and Cash dividend of rs. 2.25 per unit for Class ‘C’ Units for the year ending June 30, 2012. pReSS ReLeASe
Club Indigo golfers with Mobilink Ceo Rashid Khan and Vp Customer Care Irfan Akram at the start of the Islamabad leg of the 5th Mobilink Club Indigo Golf Invitational. pReSS ReLeASe