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Higher returns fail to spur investment

November 09, 2015

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Prime Minister Nawaz Sharif addressing the Pakistan Investment Conference in Islamabad last week. Board of Investment Chairman Miftah Ismail said 620 local and foreign investors participated in the two-day conference.—PID
Prime Minister Nawaz Sharif addressing the Pakistan Investment Conference in Islamabad last week. Board of Investment Chairman Miftah Ismail said 620 local and foreign investors participated in the two-day conference.—PID

THE repatriation of profits and dividends by most transnational companies and foreign investors working in Pakistan has surged dramatically in the last couple of years as foreign private investment continued to plummet.

Data from the State Bank of Pakistan (SBP) shows that foreign companies and investors took out $1.63bn during the last financial year, up $550m or 51pc from $1.08bn repatriated during FY13.

The payments made by the central bank during the last financial year on foreign direct investment (FDI) stood at $1.32bn and on foreign portfolio investments at $309m, against $857m and $222m respectively two years ago. The payment breakdown illustrates a significant spike in the quantum of profits and dividends sent back home by foreign investors in certain sectors and a decline in a few others.

The food companies, for example, took out $115.3m last year, up a hefty 37pc from two years ago. Similarly, the repatriation by thermal power producers grew by 34pc to $114.5m, cigarette-makers by over 100pc to$33.2m, car assemblers by 83pc to $44.4m, cement companies by 271pc to $66.9m, oil and gas explorers by over 200pc to $139.8m and financial businesses by 34pc to $421.4m.


‘Driven by growing disposable incomes of the urban middle-class, the corporate sector has grown by 18-20pc annually in the last few years’


The sum sent back home by petroleum refiners, however, saw a 48pc decline to $61.7m and the transport sector by 40pc to $47m during the same period.

In other sectors, the rise or decline in the amount of money taken out by foreign firms and investors wasn’t significant enough or remained more or less stable.

Analysts say the spike in the amount of money being taken out by investors reflects increasing profitability of transnational companies operating in Pakistan despite the security challenges and the power crunch in the country.

“The fast falling rate of inflation, growing urbanisation, a middle-class with higher disposable income, declining global commodity prices etc have all contributed to the surge in the profitability of fast moving consumer goods (FMCG) and food companies as well as cement makers,” argues Ambreen Soorani, a senior analyst at JS Global.

Banks and financial service providers have also performed well despite the drop in interest rates, as have private thermal power producers, she adds.

Indeed, a quick analysis of financial results of companies like Nestle and Unilever corroborates her statement. The sales of Nestle, for instance, grew 22pc to Rs96.5bn in 2014 from Rs79.09bn in 2012, with its after-tax profit surging by 35pc to Rs7.93bn. During the current calendar year, the company is expected to perform even better than last year.

Similarly, Unilever Pakistan’s sales rose by over 10pc during the period as its after-tax profit climbed by 14.5pc to Rs6.3bn, while Unilever Pakistan Food’s profitability surged by 37.8pc to Rs1bn from Rs729m during the same period.

Khurram Shahzad, chief investment officer at Lakson Investments, who sees growth in consumption over the last two years as the major driver of the spike in corporate profitability, insists that the rise in repatriation of profits by multinationals (MNCs) does not mean that the corporations are taking out their all of their money.

“There are several MNCs that are ploughing a substantial part of their earnings back into their operations for operational sustainability and capacity expansion, thus creating more jobs at a time when no new foreign or local investor is ready to put their money in this country despite the guaranteed profits in several sectors.”

The head of business development at Sherman Securities, Farhan Mahmood, argues that Pakistan offers enormous growth potential to foreign investors, as evident from the tremendous rise in corporate earnings in pharmaceutical, cement, auto, power, financial, food and consumer goods sectors.

“Driven by growing disposable incomes of the urban middle-class, the corporate sector has grown by 18-20pc annually in the last few years. So have their profits and repatriations thereof.”

Many analysts say the sheer size of the Pakistani market and its demography — especially the growing young population — makes the country attractive for transnational firms in almost every sector of the economy.

“The size of the market is increasing every year and our middle-class consumers are not much bothered about higher prices or saving money for rainy days,” says analyst Shahid Zia.

“Just look at the number of large supermarkets and stores that have come up not only in major cities like Karachi, Lahore or Islamabad but also in remote cities and towns. This reflects an expression of growth in consumption and consumption patterns.”

Analysts like Ali Abbasi, a director at Abbasi Securities, say while rising corporate earnings may have spiked the repatriation of profits, they have also pushed up dividend payments by listed firms to their shareholders by 23pc annually.

“We should not be concerned over the repatriation of profits by foreign companies or investors. But we should be worried about falling new foreign direct investment in the country despite the tremendous growth in revenues of foreign business operating here,” he argues.

“Unless the government ensures policy consistency and draws up a plan focused on certain priority sectors of the economy that it wants foreign investors to put their money into, it will not be able to woo FDI into the country.”

Published in Dawn, Business & Finance weekly, November 9th, 2015

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