Thursday, May 14, 2009

Is Pakistani Economy Poised to Rebound?

Amidst major counterinsurgency operations in and around Swat Valley and growing refugee crisis, there are signs of optimism by investors and bond holders in Pakistan's economy. The KSE-100, Karachi's stock index, is up 27 percent this year, compared with a 12 percent gain in MSCI’s emerging-market stock index of 26 emerging economies, including Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela. The Pakistani rupee, which declined 22 percent against the dollar last year, the second-worst performer in Asia, fell 1.8 percent this year.

Pakistan’s 6.875 percent dollar bond maturing in June 2017 yielded 18.62 percent last month, versus a record high of 26.30 percent on Nov. 3, 2008, according to data compiled by Bloomberg. The price has climbed to 52 cents on the dollar, from as low as 35 cents last year. “Broadly, we believe that it definitely doesn’t look as bleak for Pakistan,” said Joel Kim, who helps oversee $433 billion globally as head of Asian debt at ING Investment Management in Hong Kong. “They’ve passed the worst point. The IMF money has helped stabilize things.” But Pakistan's bond risk still remains high: Five- year credit default swaps based on Pakistan’s bonds show investors need to pay $2.2 million annually to protect $10 million of Pakistan’s debt for five years, the third-highest in the world, according to CMA Datavision. As recently as June of last year, Pakistan sovereign debt credit default swaps (CDS) traded at 530 basis points in Hong Kong, meaning it cost $530,000 a year to protect $10 million of Pakistan's debt from default for five years.

Terrorism has cost Pakistan $35 billion in economic losses and damage to infrastructure, according to a statement given to reporters by President Asif Ali Zardari’s aide on April 17. More than 3,500 terrorist incidents have occurred since 2007, killing an average of 84 people per month this year, the aide said.

In addition to the $7.6 billion loan from IMF, Pakistan has been promised $5.3 billion in aid by more than 20 countries to help shore up its economy and combat al-Qaeda and Taliban militants. While the political risk in the country remains high, the flow of loans and aid is helping shore up the nation's economy. Pakistani business officials say the perception of political risk is overstated and international investors are starting to return.

Strong growth and job creation in both India and Pakistan over the last five years were fueled in large part by huge inflow of cash and investment. Investment accounted for about 39 percent of India's gross domestic product in fiscal year 2008, up from 25 percent five years ago. At its peak, more than a third of investment came from abroad, according to Credit Suisse. But in the last three months of last year, foreign loans and direct investment in India fell by nearly a third, to their lowest level in more than two years, according to a report in New York Times. Foreign direct investment in Pakistan fell to $5.19 billion in the year ending June 30, 2008, from a record $8.43 billion a year earlier, government data show.

“There is now very early signs of portfolio investment starting to come back,” Asad Umar, the president of Karachi- based Engro Chemical Pakistan Ltd., told Bloomberg TV in a recent interview in New York. “Pakistan is going to come out of it earlier than the rest of the globe.”

Pakistan’s trade deficit narrowed by almost 50% in March, as imports declined faster than exports. In the same month, worker remittances were a record high at US$743 million an increase of 23% over last year. While Japan’s exports plummeted by 50%, China’s by 26% and India’s by 33%, Pakistan’s exports were down by 25%. Even though, the competitive peer group is formidable, Pakistan is the best performer.

On the corporate profitability front, during the worst global down turn in a century, Pakistan’s corporate profitability of listed companies declined by a mere 3% in aggregate in the 3rd quarter of 2009.

At the end of calender year 2008, remittances topped 7 billion dollars, an increase of 17 per cent year over year, led by higher remittances from oil-rich GCC countries, which grew by 30 per cent year on year. Similarly, FDI inflows jumped 100 per cent year on year to 708 million dollars in December, 2008, as the telecom, oil and gas, and financial-services sectors continued to attract foreign inventors, according a report in the Nation newspaper.

The IMF forecasts the economy will expand 2.5 percent in the 12 months ending June 30, the slowest pace in eight years, after growing at an average annual pace of 6.8 percent since 2002. The State Bank of Pakistan forecast in April that economic growth for the year through June will slump to between 2.5 percent and 3.5 percent, far below the 5.5 percent the government has projected -- and too slow to create the 2.5m jobs a year for its fast-growing population of about 170 million people. During 2002 to 2007, Pakistan's economy grew at an average rate of 7% annually, creating about 2.5m jobs a year, barely keeping up with the number of young people ready to join the work force each year, according to Salman Shah, senior economic adviser to former President Musharraf of Pakistan. However, the current economic slowdown has resulted in significant job losses in almost all private sectors of the economy, increasing visible signs of poverty. According to a BBC report last year, three times a day, hundreds of men, women and children line up outside dozens of Karachi restaurants for meals which are paid for by philanthropists and charity donors. These lines were considerably shorter, or non-existent until early 2008. Many of those lining up are industrial workers who have lost their jobs.

Pakistan's future, as India's, lies in the nation's ability to move workers from farms to manufacturing and in engaging more with the world rather than retreating from it. Pakistan, like India, also is relatively light on exports as a part of the overall economy. In Pakistan, exports account for less than 15% of gross domestic product, according to Shah, compared with about 25% in India and 40% in China. While India's economy must create 11-12 million new million jobs a year, Pakistan's economy needs to add 2.5-3 million jobs annually to employ all the young people entering the job market each year.

Ms. Ann Patterson, the US ambassador to Pakistan, believes that ultimately the security will depend on economic growth in Pakistan. She is working on a U.S.-sponsored investment-aid-trade based economic revival that would help offset the resentment created by America's "12- year divorce" from the region after the first Afghan War. "We're trying to get people to see that we're committed by helping with investment, Patterson told Forbes magazine, "because you meet older people and they will say to you, "Oh, I remember dam such-and-such, and the Americans built that." That's the kind of synergy we look for, because it builds goodwill for both of us."

Regardless of the foreign assistance to deal with the current crisis, I think all Pakistanis must demonstrate their care and concern by donating and volunteering to help the refugees. The key for Pakistani military's success in defeating the Taliban is in how well Pakistani government can maintain public support for the military action.

Pakistani military's robust response to the rising militancy appears to be backed by a significant majority of the people. If the Pakistani political leadership can deal with its fall-out, such as the refugee crisis, and sustain the popular support for the ongoing military action, and the government executes a rational set of economic policies, it is quite reasonable to expect an economic rebound within a year. Given strong underlying growth dynamics in South Asia, the negative feedback effects of the global financial crisis should be temporary as well. A relatively rapid rebound can be expected in 2010, with a projected revival of GDP growth to 7 per cent, spurring job growth again.

Related Links:

Declining Economy Hurts Pakistani Workers

Global Slowdown Hits Foreign Workers

Pakistan's Foreign Visitors Pleasantly Surprised

Start-ups Drive a Boom in Pakistan

Pakistan Conducting Research in Antartica

Pakistan's Telecom Boom

ITU Internet Data

NEDUET Progress Report 2008

Pakistani Entrepreneurs in Silicon Valley

Musharraf's Economic Legacy

Should Pakistanis be Proud of Their Country?


Anonymous said...

Is Pakistani Economy Poised to Rebound? Of course it is. With the amount of money being poured in by its "friends" and the Uncle Sam. the optics are appealing. The Economist was right - Pakistan has an asset that does not show up on its balance sheet: the ability to scare the rest of the world.

Riaz Haq said...


Money alone can not fix anything. It has to be accompanied by good policies, good governance and adequate human resources in terms of professionals, entrepreneurs and builders. Pakistan has demonstrated that it is capable of growing rapidly as it did during Musharraf era.

Of course, foreign cash flows and investments, just as they helped India. Investment accounted for about 39 percent of India's gross domestic product in fiscal year 2008, up from 25 percent five years ago. At its peak, more than a third of investment came from abroad, according to Credit Suisse. But in the last three months of last year, foreign loans and direct investment in India fell by nearly a third, to their lowest level in more than two years, according to a report in New York Times. Foreign direct investment in Pakistan fell to $5.19 billion in the year ending June 30, 2008, from a record $8.43 billion a year earlier, government data show.

The latest offers of loans, trade and investment by international community will help make up for the drop in FDI and exports.

Anonymous said...

Both Pakistan and India have structural problems. India needs to fast-track infrastructure investment - which it is not doing with the needed vigor. Pakistan needs to do much the same thing - except with more urgency. The boom in the Musharraf years were arguably consumer-driven. No systematic capital investments were made as evidenced by the alarm over power, water and food. Plenty of cars and a deluge of cell phones does not set up an economy for broad-based, sustained growth. So when hard times arrived, as they always do, Pakistan was structurally no better off after the boom than they were before. In comparison, India has a babu-dom that is effectively in a coma, but has a thriving entrepreneurial class that manages to make things happen inspite of the mess the state creates. Pakistani entrepreneurs with scale were effectively whacked by a combination of Bhutto's socialism and the Army's insidious businesses.

Anonymous said...

India's and pakistan's problem is that of democracy with bundle of rascal politicans with large amount of uneducated population and growth in population.

Once saving grace for india is that it does not have religious fundamentalim [ it has its own nuisance value but not that destructive ]

Election is showing that upa would come to power i feel religious fundamentalism would take back seat and development would be the key factor. HOwever in pakistan, it has yet to get its acts to gather in controlling the religious fundamentalism and armed terrorism in the border. Complement is afganistan and usa.

Riaz Haq said...

Anon: "The boom in the Musharraf years were arguably consumer-driven. No systematic capital investments were made as evidenced by the alarm over power, water and food. Plenty of cars and a deluge of cell phones does not set up an economy for broad-based, sustained growth."

Unless there are consumers and a market in place to sell to, there would be no investment. Most of the investors do not invest in the hope that there will be a market and consumers for their product or service at some future unknown date. So stimulating the economy and generate demand/consumption is a pre-requisite for attracting investors. And Pakistan saw an investment-led boom in real estate, infrastructure (roads/bridges), telecom, auto/motor cycle manufacturing etc that created over 2m jobs a year. If the Mushrraf era economic growth had not been interrupted (partly due to his own fault) and Shaukat Aziz had stayed on, I believe Pakistan's economy would have fared much better than it has. But, as the Economist put it last year, Pakistan returned to bad old days of incompetent civilian leaders who had badly mismanaged the economy in the 1990s before Mush took over.

The problem with power sector in Pakistan is that everyone wants to be a power consumer but very few people are willing pay for the electricity they consume. Power theft is very common in Pakistan, making it difficult for power sector investors to get an ROI. While it is impossible to precisely measure theft (as opposed to line loss), it is obvious that it constitutes a sizable proportion of Pakistan's overall 30 % loss rate. The situation was so severe by early 1999 that the Pakistani government assigned army units to look for illegal connections to transmission lines and rigged meters. Power theft is just one part of the financial problems for WAPDA, however. WAPDA is at the center of a public sector "circular debt" problem, in which state firms and government ministries have failed to pay power bills, and WAPDA has failed to meet obligations to them and to private sector creditors.

Riaz Haq said...

Seeking Alpha webite is reporting that a Pakistan ETF is in the works.

Global X, the developer of several sector-specific China funds, has filed for several new country-specific funds, continuing its push to develop a line of innovative international funds. Among the most interesting of the batch are funds targeting Norway, Pakistan and the United Arab Emirates. While most details are still not available for these proposed funds, a look at the outline provided in the prospectus of the economies on which they will reportedly focus provides some insights into the risk and return profiles (it should be noted that not all funds for which a prospectus is filed are eventually launched, so it’s entirely possible these ETFs never make it to market).

Riaz Haq said...

Here's an interesting except from analysis of Pakistan, calling it the Next BRIC, by

...much like Russia, Pakistan also has been one of the top-performing stock markets over the past decade. Had you been able to invest in the Karachi Stock Exchange at the turn of the millennium, you'd be sitting on a much bigger pile of profits than, say, if you had invested in the “China miracle.” Pakistan offers yet another lesson in how gleaming skyscrapers offer little guidance in predicting future stock market performance.

Investing in Pakistan: Surprisingly Big

Teeming with 169 million souls, Pakistan is the world's sixth-largest country by population. That makes it smaller than Brazil , but larger that Russia, as well as the “Next BRIC” candidates, Turkey, Mexico, South Korea and Egypt. Bordered by Afghanistan and Iran in the West, India in the East and China in the far Northeast, Pakistan is just about the size of France and the United Kingdom combined.

Pakistan's real per capita GDP of about $1,250 makes your average Pakistani slightly poorer than his counterpart in India -- and far behind the average in booming China. One third of Pakistan's population lives in poverty, and only half of the population is literate. Yet, Standard Chartered bank estimates that Pakistan has a middle class of 30 million that now earns an average of about $10,000 per year. And adjusted for purchasing power parity (PPP), Pakistan's per capita GDP approaches $3,000 per head. But take away that bit of economic affirmative action, and Pakistan's economy drops from the size of New Jersey's down to that of Alabama.

Investing in Pakistan: Edgy Relations with Uncle Sam

In the bad old days of the Soviet Union, Pakistan was a major U.S. ally. That relationship soured after the United States imposed sanctions on Pakistan after it refused to abandon its nuclear program. The “War on Terror” changed all that. After Pakistan ended its support of the Taliban regime in Kabul, American economic and military aid to Pakistan soared to more than $4 billion within three years of the 9/11 attacks. Indeed, American aid has played no small part in helping Pakistan's economy flourish over the past decade or so.

But as with most forms of handouts, gratitude is the least heartfelt of emotions. Anti-Americanism in Pakistan’s free media is just about as virulent as neighboring Iran. The Wall Street Journal’s Pakistan correspondent was ejected from the country after being charged with spying for the United States and Israel. The U.S. State Department advises U.S. citizens not to visit the country and has forbidden the families of its diplomats in Pakistan to visit since 2002.

Investing in Pakistan: A Solid Start to the Millennium

Economically, the first decade of the 21st century has been good to Pakistan. Thanks to economic reforms introduced in 2000 by the former Musharraf government, Pakistan has privatized $5-billion worth of assets, simplified its tax system and attracted large amounts of foreign direct investment (FDI) compared to its GDP. By mid-2005, the Pakistani economy was growing by 8.6%, and the World Bank named Pakistan as the top reformer in its region and among the top 10 reformers globally.

That changed abruptly with the onset of the “Great Recession.” Pakistan's ensuing balance-of-payments crisis and runaway inflation forced the IMF to step in, and offer a $7.6-billion emergency financing package in late 2008. To its credit, the Pakistani government kept its side of the bargain, maintaining its foreign exchange reserves above target and its fiscal deficit below. The Pakistani economic crisis has eased substantially, and in 2010, the economy is expected to grow at least 4%.

... The stock market index in Karachi has risen by more than 1,000% since 1999. And in 2002, Pakistan was the top-performing stock market in the world.

Riaz Haq said...

The World Bank will extend an assistance of upto $5.5 billion over FY 12-14 to support Pakistan’s poverty reduction and development agenda, reports Pakistan Today.

According to Bank’s Country Partnership Strategy Progress Report, a mid term review and implementation assessment, the Bank has responded flexibly in the face of the tremendous challenges Pakistan has gone through over the past year or so.
World Bank Country Director for Pakistan Rachid Benmessaoud said they will continue strong support to Pakistan while keeping a keen eye on implementation to ensure that these efforts translate into real results on the ground.
The progress report says the overall focus of the Bank’s strategy- to help Pakistan’s economy get back onto the path of high, sustained growth –remains valid and consistent with the overall priorities of the government of Pakistan as articulated in its New Framework for Growth Strategy. Also, the Bank support will remain centred on the original pillars of the CPS- the economic governance, human development and social protection; infrastructure and security and conflict risk reduction.
The Bank engagement over FY 12-14 is projected at up to $ 4 billion in new International Development Association (IDA) credits and International Bank for Reconstruction and Development loans. This will be supplemented by a robust programme under the Multi donors trust fund (MDTF) with initial commitment of $ 140 million and IFC support projected at $ 1.5 billion.