Alert Sign Dear reader, online ads enable us to deliver the journalism you value. Please support us by taking a moment to turn off Adblock on

Alert Sign Dear reader, please upgrade to the latest version of IE to have a better reading experience


Outlook for economic revival

May 20, 2013

THE gain of one stock broker is sometimes the loss of another, which is why market participants have a penchant to disagree.

Yet, when it comes to Pakistan Muslim League-Nawaz’s thumping victory in the elections, they seem to speak with one voice. Almost everyone admits that the twice-tested industrialist Prime Minister Nawaz Sharif’s coming into power bodes well for the revival of ‘business confidence’.

The jubilation of investors was reflected by 11 consecutive rallying sessions at the country’s stock market, with a sharp spurt of 78 per cent in volumes and the KSE-100 index gain of five per cent after first reliable foreign forecasts put the PML-N ahead of the rest in the race to the seat of power in Islamabad.

Although political parties usually go ‘long’ on promises in their manifestos and fall ‘short’ on delivery, the document nonetheless gives an insight into the party’s position on important issues. In its manifesto, the PML-N talks of ‘growth, interest rates conducive for borrowers, reduction in upfront cost of investment in sectors demanding priority and revival of business confidence’.

The party also promises to identify and pursue privatisation of pubic sector enterprises (PSEs). Stock market participants lament that privatisation was never a priority in the PPP’s just-ended tenure, when not a single entity was put up for sale. Conversely, in the PML-N’s previous days in power, dozens of ‘big ticket’ PSEs were put up on the auction block, which went on to enrich both the market and the investors.

Under ‘other financial sector reforms,’ the PML-N manifesto admits: “A vibrant financial sector, supported by reforms in the capital market, is vital for the revival of business confidence and private investment. With said reforms resulting into substantial new investment in the corporate sector, it would generate employment in the country.”

Regardless of the manifesto, however, the corporate sector is likely to jostle for attractive tax benefits for listed companies. With the elimination of the five per cent lower tax benefit for listed companies some time back and the imposition of a flat rate of tax at 35 per cent for all corporate entities, the 60,000-unlisted entities scarcely have a reason to enter the equity market, where only 569 companies are currently on the trading list.

Unlike the previous PML-N era, when, on average, a dozen companies would seek listings in a year, the shoe is now on the other foot. There are more de-listings than listings, and local investors’ concerns mount as foreign investors in big corporates continue to withdraw their stakes: the recent examples being Hub Power Company and Unilever Pakistan.

But voices are already being heard for a status-quo on tax rates, as a reduction would mean a hit on the already low tax revenues, which the government can ill-afford at a time when the country is in the middle of an economic imbalance, both on internal and external fronts.

Arif Habib Limited analyst Khurram Schehzad says the Sharif brothers’ competitive advantage can also bring in-kind funding, such as crude oil import facility on deferred payments from Saudi rulers, with whom they enjoy a friendly relationship. Other initiatives could dilute the IMF need, while creating a bargaining position for Pakistan.

The international credit rating agency, Standards & Poor’s, has already expressed a positive stance on the country post-election, which could give greater confidence to foreign investors who have led the stock market rally through a massive portfolio investment of over $132 million in the current year to-date.

To dispel investors’ sector-wise concerns, PML-N’s second-in-command, former Punjab chief minister Shahbaz Sharif, stated in a recent TV show that fertiliser factories would be allowed to operate according to a schedule. For load-shedding management, the market expects a new setup to arrange short-term liquidity injections for the power sector in general, and small Independent Power Producers in Punjab and the country’s biggest oil marketing company, PSO, in particular, to ensure smooth fuel supply, before the PML-N’s economic team implements long-term structural reforms in the energy chain. This would also give fillip to the local cement and textile sectors. Banks are also expected to benefit in the long run from overall economic revival. With an expected improvement in law and order in Khyber Pakhtunkhwa, drilling activities and increased investments from foreign oil and gas exploration and production (E&P) partners could benefit the KSE’s heaviest weighted oil and gas sector. Drilling activities have currently come to a halt, and its impact is reflected on the below-market performance by E&P companies in the last three quarters of financial year 2012-13.

Majyd Aziz, former president of the Karachi Chamber of Commerce and Industry, says overall policies during the previous two PML-N stints have been pro-business and pro-economy. “The prime advantage for the business community is that there is an exceptionally large number of business leaders who are more comfortable with the Sharif brothers,” he says, before adding that it provides them a vantage position to promote business interests and enables them to get their point of view across smoothly.

Most people are encouraged by the industrialist background of the party’s leadership, which they say is a key factor in understanding the country’s economic problems. The Sharif family has interests in sugar, textile, paper and board, steel and engineering sector.

Some people also believe that the country’s biggest conglomerate, the Mansha group, due to its close ties with the Sharifs, might be the biggest beneficiary. It would enable the group with several big companies in cement, textile and insurance, which are listed on the KSE, to unroll expansion plans. But the same is true for all other industrial groups and companies as well, which had put such plans on the hold.