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Tremors in capital markets

August 31, 2015


PAKISTAN’S stock market suffered massive losses last Monday as the benchmark KSE-100 index crashed 4.11pc during the day.

Analysts linked the fall to the turmoil in the global equity markets on concerns over the the Chinese currency’s depreciation and a flagging world economy. The rupee also fell by 2.5pc against the dollar as panic gripped the domestic currency market.

The stocks, however, regained some lost ground, with the KSE-100 index spiking by 2.7pc during the last two trading sessions of the week as the global equity markets calmed down. While the rupee hasn’t bounced back, the central bank dubbed the currency losses as ‘temporary’ despite foreign portfolio investors pulling out $41m.

Even though the tremors felt in Pakistan because of developments in China have apparently subsided, opinion remains divided on the long-term impact of Beijing’s shift from the export- and investment-led growth model to a consumption-led growth one, as both countries plan to push bilateral trade to $20bn over the next five years.

Even though the tremors felt in Pakistan because of developments in China have apparently subsided, opinion remains divided on the long-term impact

“In my opinion, the devaluation of the Chinese currency will have a transient impact on Pakistan’s economy,” Khalid Mirza, former chairman of the Security and Exchange Commission of Pakistan (SECP) and the Competition Commission of Pakistan (CCP), told Dawn. “I think that the ‘minor’ effects of the developments in China can easily be alleviated with a little better management of the domestic economy,” he added.

Nevertheless, exporters like Amir Fayyaz see a greater competition for Pakistan’s textiles in the world markets because of a weaker yuan. “The weakened yuan means that China’s textile and other exports will become cheaper and we may lose more market share in the months to come,” the textile manufacturer told this scribe.

But he did not agree with the view that the recent decline in the value of the rupee on the heels of the yuan’s devaluation was enough to make Pakistan’s exports, particularly those of textiles — which fetch 55pc of the country’s total export revenues — competitive in the international markets.

“The exports have been on a decline since June. If they are to be revived and jobs saved, the government will have to do take immediate action to help reduce the cost of doing business. It will have to compensate exporters through rebates and reduce energy prices if it is difficult for it to depreciate the rupee for some reason,” he argued.

He pointed out that all the regional rivals of Pakistan — India, Bangladesh and others — have significantly depreciated their currencies to ensure their export competitiveness.

“Nations across the world have adjusted the values of their currencies (against the dollar) to stay competitive. How can we swim against the current if we want to protect our market share? And for how long?”

Anjum Nisar, a manufacturer of chemicals, agreed with him. He felt that a cheaper yuan would not only create problems for the ‘expensive’ exports from Pakistan, but could also lead to the dumping of Chinese goods in Pakistani markets at the expense of domestic industries.

“China has depreciated its currency to boost its export growth and the chances of it flooding its goods in our market cannot be ruled out. China’s ingress into the Pakistani market is already stunting the domestic manufacturing sector because of the rising cost of doing business here due to spiking energy prices and shortages,” he insisted.

Over the last one and a half decade, China has become Pakistan’s largest trading partner, with the bilateral trade volume shooting up to $16bn last year from less than $1bn in 2000. The trade balance remains heavily tilted in favour of China, with Pakistan’s exports estimated at around $3bn.

The rapid rise in imports from China has been blamed for the stunted growth of the manufacturing sector and significant job losses. But the increase in the bilateral trade volume isn’t the only worry for businessmen like Anjum Nisar. They insist that weak customs controls at the borders have also encouraged most importers to under-invoice their imports and pay the Chinese suppliers in cash or through informal channels at the cost of the local industry.

“Imports from China are under-invoiced to the tune of $3-4bn every year, to the detriment of domestic producers and government revenues,” Anjum asserted.

Financial analysts like Shahid Zia believe that the depreciation of the yuan will not only pressurise Pakistan’s exports and push imports from China but may also create volatility in the currency and equity markets going forward.

“It is not certain if Beijing plans to devalue its currency further or stop at the present level. If and whenever it does, it will unleash another round of currency devaluation across the globe. Pakistan isn’t immune to the global developments even if it is not as much integrated with the world economy as other emerging economies, and it could see its equity and currency markets react sharply.

“In my opinion, the tougher test for Pakistan’s economy will be posed by the expected hike in interest rates in the United States sometime next month.”

Published in Dawn, Economic & Business, August 31st, 2015

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