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The PSX responds

Updated July 02, 2018

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THROUGHOUT the past two weeks the business and investor community remained on tenterhooks regarding the country’s short listing on the Financial Action Task Force (FATF) grey list. Yet leaders at the Exchange state past experience indicates that despite the short listing business will continue as usual with minimal discrepancies.

Dr Shamshad Akhtar, the caretaker finance minister along with her team rushed to the French capital to convince the international community that the action plan put forth by Pakistan in response to their instructions in February was effective and would be implemented in 15 months.

“Potential inclusion on the FATF ‘grey list’ is a clear negative for the economy, the financial system and asset prices, but its impact is never a knee-jerk reaction” assures Hamad Aslam, director and head of research at Elixir Securities Pakistan.

Potential inclusion on the FATF ‘grey list’ is a clear negative for the economy, although during the 2012-15 listing it was business as usual, if not better,” says Hamad Aslam, director and head of research at Elixir Securities

He observed that it may result in additional due diligence by foreign financial institutions, which are involved in documentary credits (LC’s), cross-border payments via SWIFT, foreign inflows into the Pakistan Stock Exchange (PSX) and bond issuance by the Pakistani government.

But the country has been there before. Topline Securities stated in a report that Pakistan had previously been part of high risk jurisdictions (blacklist) in 2008 and 2012 and the grey list in 2012-2015.

Hamad Aslam of Elixir recalls that during 2012-15 it was business as usual, if not better, for most economic indicators such as Foreign Direct Investment, foreign portfolio investment, Euro bond Yields, Rupee and KSE-100 index.

“The country even managed to get an IMF bailout in 2013 and raised $3 billion from global debt markets in 2015”, he said. But for all that, the major concern observed during that period included exodus/curtailment of operations by foreign banks and a rating downgrade by Moody’s.

Although the addition to the watch list does not imply any economic or financial sanctions for the country; it does serves as a “notice” to the country’s financial institutions. Since a foreign financial institution has to be involved in most dealings, the risk appetite of foreign banks decreases.

Indicators such as the FATF ‘grey list’ are used by all global banks when they carry out client due diligence.

When clients appear on those lists, enhanced due diligence kicks in,

which could be much more costly for foreign banks. With the cost of doing business going up, coupled with a greater likelihood of potential fines/penalties, global banks start to calculate the costs and benefits of doing business from the shortlisted country.

Implications for the stock market: For the ordinary investor in equity who was unaware of what getting grey or black listed meant, the situation was scary.

Topline Securities analysts say: “to simplify, as per out understanding, countries that are identified as having deficiencies in their financial system are placed on the ‘grey list’ while countries that are not making sufficient progress in addressing deficiencies or have not committed to an action plan are then moved to a ‘black list’ and termed high risk jurisdiction.

As they say on Wall Street, for the equity markets, “uncertainty is worse than bad news”.

For market sentiment, the uncertainty surrounding Pakistan’s inclusion on the grey list in the past two weeks was worse than the actual inclusion. Had the final decision regarding the listing been announced earlier, the market would have experienced a knee-jerk reaction but would have quickly got over the event.

Instead, the PSX witnessed the worst week of 2018 (between June 19-22); with the KSE-100 index churning out a whopping 2,043 points (4.7pc) loss for which a major reason was the scare caused over the outcome of the FATF meeting.

Last Friday, Mr Arif Habib, former chairman of the Exchange said that the market had already incorporated the threat of FATF grey listing in stock prices, but inclusion in the ‘black list’ was still of concern.

Hamad Aslam of Elixir Securities mentioned that during the last inclusion in 2012-15, not only did the economic indicators continue their upward momentum, but Pakistan equities recorded one of the best times in history. The KSE-100 index grew two-fold, foreign portfolio investment flows were recorded at over $900 million and United Bank Limited successfully concluded its Secondary Public Offering.

Published in Dawn, The Business and Finance Weekly, July 2nd, 2018