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Investors’ sentiments in a changing environment

May 20, 2013

As pundits in the capital market are betting on further gains following the PML-N’s election victory, the business community is poised to take a fresh look at the emerging investment environment.

Those who had put their investment plans on hold hope to put them on the fast track. The KSE share index roared ahead in the first post-election week beating 20,021- mark and finishing at an all-time high 20,637 points with a gain of about 621 points over the previous week.

Since 2000 the stock market has recorded a positive trend. The current political development, however, has given it a further boost. The capital market went up 21 per cent this fiscal year, next only to Japan and Philippines as Asia’s top gainers.

The trend watchers expect a display of stronger business sentiments in the domestic investment graph. They project a jump in the investment rate by good 20 per cent from the current dismal level of 12 per cent of the GDP during the very first year of Nawaz Sharif-led government. They estimate that by the end of five-year term of the government, the total investment as percentage of the GDP may double from the current level.

According to the last Economic Survey of Pakistan, the total investment declined from 13.1 per cent to 12.5 per cent of GDP in 2011-12. The situation in the transitional year of 2012-13 is not expected to be any better.

The fixed investment has declined to 10.9 per cent of GDP in 2011-12 from 11.5 per cent a year ago, whereas private investment witnessed a contraction of 7.9 per cent of GDP in 2011-12 as compared to 8.6 per cent of GDP in the preceding year. Not much improvement is expected as the growth strategy of the government failed to excite investors who remained focused on negatives in the economy.

Despite strenuous efforts the PPP government failed to mobilise reluctant investors still not ready to forgive the party for its historic sin: nationalisation of businesses in 1970s. The low investment under Gilani/Raja led PPP rule (2008-2013) dragged down the GDP growth rate to lowest five-year average of less than three per cent per annum.

The installation of the Nawaz government will amplify the impact of positive factors to energise entrepreneurs into action, said a business leader. Currently inflation rate is in single digit, the policy rate is at 9.5 per cent and banks are liquid and inclined to extend credit to the private sector. The interim government is applying restraint to its borrowings to create space for the private sector credit.

The businessmen will watch closely how the next federal economic team handles energy crisis and resolves issues related to depleting foreign exchange reserves threatening macro economic stability. Many contacted for comments expressed confidence in Nawaz Sharif’s leadership to steer the economy through this difficult phase. They hoped that the next deal with the IMF will be grounded in reality.

“If the Nawaz Sharif government moves to carry out market-friendly economic reforms it will build confidence of the private sector waiting to commit new resources in a variety of business options both in service and manufacturing sector. At 20 per cent incremental rate of investment over the next five years, the investment to GDP ratio can double”, chief economist of a foreign bank commented over the phone.

Some experts, however, found it to be too early to jump to conclusions based on hailers from the business leaders on Nawaz Sharif as the next prime minister.

“We must realise the intensity of country’s economic problems. I do not think Pakistan can afford to pamper the risk-averse businessmen any longer, no matter who occupies the office of the prime minister. Knowing many of them personally I do not expect them to transform overnight because PPP is out and PMLN is in”, a senior economist turned bureaucrat who found high investment expectations unrealistic, commented.

“Pakistan is transforming most certainly though the pace is erratic and the direction not clear cut. Stable democracy will draw foreign investor to Pakistan where consumers spend most in the region”, countered a defender of the private sector.

“Yes, the private investment is motivated by profit and investor does try to minimise the risk in what was touted to be the most dangerous country. Does that make business community of Pakistan any less worthy? It is absurd to blame the whole community for the crony culture nurtured by rulers”, he said.

Commenting on low investment rate, the gentleman blamed mismatch of economic policies and the misplaced economic priorities of the PPP government.

“I hope and pray that public and private, local and foreign investment will increase in near future to generate new wealth. An inclusive growth model is imperative for the expensive democratic exercise to deliver improved living standards for the people who came out on the election day to save the system despite threats of anti-democratic elements”, another economist said.

“The resource situation does not allow the government to make big public investments, you have no other option but to depend on the private sector for investment and growth,” he concluded.

The fact is that the business fraternity is anxiously waiting for the next government to assume power, to settle the political dust and complete the election cycle. They seem to be all set to seal deals and roll out their investment plans. The feel-good factor may outweigh multiple odds and pull up the low lying investment graph.

A rare combination of key factors, the not-so-high interest rates, single digit inflation and liquid banks present a good opportunity to entrepreneurs to demonstrate their entrepreneurial ability.