Until mid-2007, foreign investment in Pakistan rose steadily. For the fiscal year that ended in June 2007, the country received $5.2 billion in foreign direct investment and $1.8 billion in portfolio investment. The investors have turned lukewarm since the second half of last year. In the eight months that ended in February, foreign investment was just two-thirds what it was in the same period one year earlier.
At the Karachi stock market, the numbers continue to look good. Even with the turmoil of 2007's last months, the KSE 100 index was still up 40% for the year. And its performance so far in 2008 compares very well not just with Western markets, but with the Bombay Stock Exchange's Sensex index, which has suffered double digit drop.
While the new government of Prime Minister Gillani faces many economic challenges including food and energy crises, the expectation of relative stability is likely to spur foreign investors to start pumping money back into the Pakistani economy.
One of the triggers investors are expecting is the resumption of privatization, particularly of the banking and the energy sectors. According to the Wall Street Journal, the new government's first test is coming up in the banking sector. Last year, Pakistan announced plans to sell stakes in the National Bank of Pakistan and Habib Bank through global depositary receipts, or GDRs, on the London Stock Exchange. As political storm clouds gathered, the sales -- expected to be for a 23% stake in NBP and a 7.5% stake in Habib Bank -- didn't materialize.
The Journal says that investors are asking if the new government, formed by parties that have promoted populist policies, can take the measures needed to avert an economic crisis. "Let's not skirt around the issue that these guys have been in power in the past and they've had a pretty bad track record in governance and also dealing with foreign investors," says Sakib Sherani, an economist with ABN Amro Bank in Pakistan.
In spite of the economic woes, some observers expect the Karachi market to gain 20% to 25% in 2008, in line with growth in corporate earnings. The expectations are based on the idea that some sectors of the economy, such as real estate, are undervalued, and on the continuing attractive valuation of Pakistani stocks. By some estimates, stocks in Pakistan have a historic average price-earnings ratio of 11. The prospects for outsize returns in Pakistan relative to the rest of the world are likely to revive Pakistan as a cash magnet in 2008.
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