KARACHI, Aug 24: The fears of recession in US, the world’s biggest economy which have been triggered by problems in housing slump and credit squeeze, are far from over.
In our country, the prophets of doom who forecast country’s stock market to take a beating have been proved right, but only partially.
There is a near consensus among prominent market players that the blame for a five per cent or 645 points plunge in the Karachi Stock Exchange 100 shares index this week should be pinned less on the US subprime mortgage meltdown and more on the dramatic developments in the country’s political front.
The point is perhaps proved by massive volatility on the Wall Street where investors preferred to wait and watch in spite of the statement by head of Countrywide Financial Corp, the biggest US mortgage company that housing downturn would create a recession.
The US Commerce Department’s reports on Friday were more optimistic, showing new-home sales increase by 2.8 per cent in July.
Europe and Asian markets have also shown signs of recovery after nearly three weeks of turmoil.
On Friday, Asian stock markets posted their biggest weekly gain in more than 19 years.
If Pakistani markets were to follow others, there should have been a major upsurge in stock values on Friday.
But a 51 points increase at close, after touching about 200 points low, was scarcely noticeable.
So would the economy of Pakistan be hurt by US subprime mortgage meltdown?
Pakistan’s low exports to GDP would act as a blessing in disguise, to forestall the impact, writes Samiullah Tariq, analyst at InvestCap, in his report of Friday.
He mentions that Pakistan’s economy has historically had a low correlation (in terms of exports as percentage of GDP) with the global economy.
In FY07, exports remained 11.7pc of the GDP as opposed to far- eastern countries where exports are sometimes even higher than 100pc of the GDP.
In addition, US markets contributed 28.4pc to Pakistan’s exports, which comprise low value-added products (since Pakistan’s manufacturers do not have their own branding, designing, sales distribution, etc.).
Hence, the analyst believes that slowdown in US economic growth would have minimal impact on Pakistan’s economic growth.
On the global front, Asian economies were expected to be decoupled from the US economic growth as Chinese retail sales growth of 16pc p.a. provided confidence to investors in the emerging markets.
On the other hand, lower US growth would mean stability (not decline as demand from India and China was expected to continue to grow) in commodity prices, including oil. That would be beneficial for Pakistan as the country imports more than three-fourths of its oil demand which is a drag on the import bill to the extent of 24pc.
Lower oil prices would reduce Pakistan’s trade deficit, resulting into lesser negative contribution from net exports.
On the investment front, total foreign investment of US$8.4bn was 5.8pc of Pakistan’s GDP.
US share was around 25pc in total foreign investment up to April-07.
A credit crunch in the US might negatively effect investment decisions made by the US money managers. However, liquidity around the world (with countries, like Saudi Arabia and China, having higher current account surpluses of $146bn and $250bn respectively) which was currently attracted by the US securities (US has gathered $823bn in the last 12 months) might be diverted to some other destinations in emerging markets, including Pakistan, which has a low correlation with the US economy.
Conclusion drawn by Samiullah and several other economists suggests that the effect of housing slump in US was not expected to be hugely visible in Pakistan.
They do not attribute the slowdown in foreign inflows to Pakistan (15pc decline in foreign investment for July-07) to US problems with housing sector—which any way has many more pressing problems on its head—but attribute it to the prevailing uncertainty on the political front.
As every stock strategist knows: Uncertainty is worse than bad news!