ISLAMABAD, 27 January 2003 — The key cause of Pakistani bourses rapidly rising recently is inflow of investment dollars of overseas Pakistanis and declining yields of other forms of investment.
The benchmark Karachi Stock Exchange’s KSE-100 index was heading toward the 3,000 mark. But the balloon got its first pric this week. It brought the KSE-100 down to 2,617.49 by the weekend. In six straight business days, KSE index was down 333 points — 11 percent. Its Jan. 17 high was 2,954.63. But will euphoria that started six weeks ago last long? Opinions are divided. “The present dip is a temporary phase and a normal phenomenon of an active market anywhere in the world,” claims Khalid A. Mirza, chairman, Security and Exchange Commission of Pakistan (SECP), the stock market regulator. “The bulls will receive more battering, as the downslide is not yet complete, and the market is still overbought,” expert of the bourse says.
SECP has issued warnings to a dozen bourse operators for overextending business without financial backing, just for speculation. It meant failure of settlement of traded shares and panic over the bourse. The SECP action brought the market further down, and halved the interest rate on speculative finance as business shrank. The bourses have faced problems for a long time. Less than half a dozen new companies are annually listed on the stock exchange. About only half of the 422 companies which announced results and profits in 2001, could do so in 2002.
Shaukat Aziz, finance minister during the last three years of President Gen. Pervez Musharraf’s government had attributed the stock market boom to: “A significant turnaround of the economy, resulting from economic reforms,” besides IMF-directed stabilization and structural reforms. “This environment has placed the economy where it is poised to take off,” he diagnosed.
Mirza, however, claims that it owes to stock market reforms that have strengthened investor confidence. The steps included a visible transparency and integrity of the market stemming from strong regulatory measures, including faster settlements of traded scrips, regular and quarterly announcement of corporate accounts, reconstitution of the boards of directors of bourses by eliminating the doubtful ones, and implementation of the code of corporate governance.
Besides what Aziz and Mirza claim there is a third dimension: The softening of the austere monetary policy and improvement in the exchange rate regime. Working in these twin fields, the State Bank of Pakistan (SBP), the central bank, has succeeded in stabilizing rupee. It has appreciated close to 10 percent in the kerb, and 9.05 percent in the interbank market since September 2001. In fact the kerb market is melting down. “We are advising customers to get their dollars changed into rupees from the banks,” was the advise by the country’s leading money changer.
The SBP has reduced the discount rate for banks, and initiated moves to get interest rate slashed by commercial banks, although, due to their inherent inefficiency and inertia, the later have been digging their heels and were extremely slow in implementing the central bank’s policies. SBP also cut the Treasury Bill (TB) rates as well as the yields on the long-term official Pakistan Investment Bonds (PIBs). It has, on the one hand led to rapidly rising liquidity with the banks and financial institutions, and forced them to look for alternate avenues for investment as yields on these instruments have fallen rapidly.
SBP, this week, for instance, provided 3.41 percent yield on 3- month TBs down from 3.90 percent last month, and 3.69 percent on one-year TBs down from 4.44 percent last months.
Stocks, compared to fixed income securities and income from banks, also enjoy a tax break as the dividends are taxed at 5 percent for corporations and 10 percent for individuals, while the capitals gains are tax-free. There are some signs that bank credit offtake to private sector has now begun to improve. But lack of credit demand also has increased bank liquidity.
Faced with such excess liquidity the financial institutions, the key buyers of stocks, moved their investments to scrips that promised high yields. About a dozen major companies announced good dividend over the last few weeks. It spurred the investment further, raising demand for such stocks, pushing up prices. Some dividends and yields were as high as 14 percent plus a 112 percent benefit in capital gains at the peak of the bourses boom.
It attracted a lot hot money chasing short supply of good scrips. It was how this money was parked their. But, the fragility of the bourses is amply demonstrated by the fact that in reality there are less than half a dozen good scrips that command the bourse. In case even one of them sends a bad signal, the whole market feels the tremors. Take Hubco Electric, which along with Pakistan Telecom and Pakistan State Oil, is the pre-eminent player. When Hubco announced Jan. 20 passing over the dividend for the half year to June 30, 2002, its share started declining, sending shockways into the bourse.
The KSE’s rally was interrupted Jan. 21, as KSE-100 plunged 125.60 to 2,795.03, or 4.30 percent in a single day. It was the sixth largest one-day drop in the bourse’ history. Is it an end of the speculators dream of overshooting 3,000 within days? The total market capitalization that day declined to Rs.614.287 billion, from Jan. 19 high level of Rs.647.0 billion. The index had stayed on highs ranging from 2950.29 on Jan. 15 to 2954.63 on Jan. 17 and 2920.63 on Jan. 18. The index over the weekend was 2,617.49.
What caused the Jan. 21 plunge, that not only continues but has been deepened further? The day saw heavy panic selling in all the key scrips, hit by reports of what analysts said “exposure problems of capital adequacy.” It followed large unsettled carryover business from the previous weeks of the boom. The contributing factor for the plunge was an overbought market and very large carryover business. A range of blue chips suffered declines. These included electricity, petroleum, banking, insurance, pharmaceuticals, autos, chemicals, and fertilizers, both on regular and forward counters. But, the question over the weekend is: How long the bears will dance, while the bulls are down? The jolt will take months for investor confidence to restore.