Saturday, November 24, 2018

Top Asia Investment Strategist Chris Wood Sees Strong Economy in Pakistan

Speaking at a recent Delhi investment conference, Managing Director and Chief Strategist Christopher Wood of CLSA (formerly known as Credit Lyonnais Securities Asia) surprised everyone, by saying that he loves the Pakistan stock market more than any other in Asia, according to Indian media reports. Wood, based in Hong Kong, has been named as the "best strategist" in Asia several times by magazines such as Asiamoney and Institutional Investor.

Christopher Wood of CLSA in New Delhi, India
Strong Recovery:

After recently visiting Pakistan for the first time,Wood wrote that Pakistan faces some short-term issues  but its "economy can recover quickly from its latest crisis once the current hole in the balance of payments is plugged, as is likely to be the case by a combination of China and IMF funding, combined with some extra support provided by Saudi Arabia".

Exports as Percentage of GDP. Source: CLSA
Wood explained that "minimal (private sector) debt points to a strong recovery". He said "it was interesting to learn of the resilience of the country’s private sector with debt concentrated very much at the government level". "Pakistan is well positioned to to benefit from the US-China trade war", he added. A similar conclusion has recently been reached by Tokyo-based Nomura Securities. Pakistan exports are currently just 8.2% of GDP, among the lowest in Asia.

Pakistan's Private Debt. Source: CLSA

Low Private Debt:

Wood wrote: "Consumer loans and SME loans accounted for only 12% of total bank loans (PKR498 billion and PKR422 billion respectively) at the end of 2Q18, while the loan-to-deposit ratio of the banking system is only 53%, down from 75% in 2008 (see following chart). Meanwhile, 69% of bank loans are to the corporate sector. But it is not leveraged, with corporate debt totaling only 16% of GDP."


Stock Market Valuations:

Wood finds Pakistan stock market particularly attractive because of its significantly low valuation relative to its Asian peers. Wood wrote: "The attractive point is low valuations and high dividend yields. The market is on 6.9x forecast calendar 2019 earnings based on a universe of 47 stocks and a 2019 forecast dividend yield of 8.2%."

CLSA Recommended Weightings


Top investment strategist Christopher Wood of CLSA sees strong recovery of Pakistan economy once the short-term balance of payments crisis is overcome.  Wood attributes it to "minimal (private sector) debt". He says "it was interesting to learn of the resilience of the country’s private sector with debt concentrated very much at the government level". "Pakistan is well positioned to benefit from the US-China trade war", he added. A similar conclusion has recently been reached by Tokyo-based Nomura Securities. Pakistan exports are currently just 8.2% of GDP, among the lowest in Asia.

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Riaz Haq said...

Pakistan is moving towards a digital revolution. But is it ready to reap the benefits?

As Pakistan climbs out of the war against terrorism, it is well on its way to development, both economic and digital, according to a recent article that appeared on the World Economic Forum (WEF).

With a current economic growth rate of 5.8 per cent, investor confidence in the country has improved, the WEF report says. Earlier this month, Google's Head of Large Customer Marketing, South Asia, Lars Anthonisen suggested entrepreneurs to consider expanding their campaigns to Pakistan because the country was on its way to "produce one of the largest digital audiences in the world".

Apart from an improvement in the security situation, Pakistan's digital growth is also triggered by China's investment in various sectors, including infrastructure and technology. Recently China-based e-commerce giant Alibaba bought, Pakistan largest online shopping platform.

Ant Financial Services, that is China's biggest online payment service provider, also bought a 45 per cent share in the Telenor subsidiary, Telenor Microfinance Bank "to bring mobile payment and inclusive financial services to individuals as well as small and micro businesses in Pakistan".

Apart from business investments, the Chinese government is also investing in the country under the China Pakistan Economic Corridor (CPEC), a flagship project of President Xi Jinping's grand Belt and Road Initiative (BRI). Considering that China is ahead of most countries when it comes to developing future technologies, it is not a far-fetched assumption that development of digital connectivity will be a part of BRI.

Exclusive: The CPEC plan for Pakistan’s digital future

CPEC is not only focusing on improving connectivity through proper infrastructure but also on developing the digital sector in order to ensure that the initiative is successful. For instance, one of the projects that is part of CPEC is the laying of 820 kilometres of fibre-optic cable, that will connect more Pakistanis to the digital world.

The WEF article notes that the Pakistani government is ensuring that the investments benefit its people by making the CPEC deals more transparent.

Considering that a majority of Pakistan's huge population is under 30, developments in the digital sector will help unleash the previously untapped potential of the country's youth. They will also help bring the youth into the financial fold.

The impact on the economy can also be significant. According to the Small and Medium Enterprises (SMEs) development authority, about 90 per cent of businesses in Pakistan are SMEs that have a 40 per cent share in the country annual gross domestic product. Developments in the digital sector can help SMEs reach more consumers and achieve growth.

Riaz Haq said...

#Pakistan says it can afford to wait for an #IMF bailout. Pakistan is looking to bridge a financial gap of at least $12 billion caused by its latest balance of payments #crisis. #debt #deficit … via @bpolitics

“We aren’t in hurry,” Umar told Bloomberg on the sidelines of a conference in Islamabad on Wednesday. “We are covered even if it delays for two months.”

Pakistan’s Finance Minister Asad Umar said the government can afford a two-month delay to stalled bailout negotiations with the International Monetary Fund with talks set to continue on Thursday.

“We aren’t in hurry,” Umar told Bloomberg on the sidelines of a conference in Islamabad on Wednesday. “We are covered even if it delays for two months.”

Earlier in November, discussions with the IMF hit an impasse over the fund’s proposed changes to Pakistan’s currency and tax policy. Umar said Pakistan’s request will be taken by the IMF in time for a January meeting of its executive board.

Pakistan is looking to bridge a financial gap of at least $12 billion caused by its latest balance of payments crisis. The nation’s foreign exchange reserves have dropped to the lowest in more than four and a half years.

The nation’s central bank confirmed last week that it had received $1 billion from a total $3 billion direct support deposit pledged by Saudi Arabia. The package was promised after Prime Minister Imran Khan was one of the few heads of state to attend the Future Investment Initiative in Riyadh after it emerged Jamal Khashoggi, a Saudi critic, was killed inside the kingdom’s consulate in Istanbul in October.

Khan has also traveled to China and the United Arab Emirates in an attempt to drum up similar financial assistance from friendly countries. So far his success has been limited.

The former cricket star was initially reluctant to approach the IMF after U.S. Secretary of State Mike Pompeo said in August that he would be watching to see if Pakistan’s new government used the fund to pay off billions of dollars in the opaque Chinese loans.

“We still want to have the program,” Umar said. “But we’re not in hurry to have it. It’ll ease and open up other funding avenues.”

Anonymous said...

Very knowledgeable analysis. With Chinese stock markets receding, here is Shanghai, Pakistan stock market is seen as the next frontier. Many Chinese institutional investors are planning massive investments in Agri and Agri-based companies. We should use this opportunity and position our-self.

Anonymous said...

More good news coming our way. Time is right to peg all investments and returns in Renminbi. Also we should peg Pak rupee to basket of RMB and EUR in the long term. We should derisk from any business dependent on USD.

Lubna said...

Because of a very low savings rate economy will run into debt/deficit issues above growth rate of 5% give or take. Pakistan with its perennial low savings rate can do 4-4.5% GDP growth at best. We can get financing from outside but with a low savings rate we will create deficits over and over. Result IMF #13.

Riaz Haq said...

Lubna: "We can get financing from outside but with a low savings rate we will create deficits over and over. Result IMF #13."

The need for IMF bailout arises because of Pakistan's low level of exports relative to its GDP and imports.

Pakistan's exports of just 8% of GDP are among the lowest in the world. If these were to double to 16% of GDP, Pakistan can manage its external accounts much better. Imran Khan's government needs to focus on boosting incentives for high value export oriented industries to make it happen.

Pakistan is also seeing significant increase in remittances from overseas Pakistan which have doubled to $20 billion over the last decade.

AS to the savings rate, it's a function of incomes and labor force participation rates which are both rising. These trends will help boost Pakistan's savings rate and GDP growth.

Abid H. said...

This is a Whatsapp share from renowned Economist my friend & Ex-colleague, Sakib Sherani, an IBA graduate, who runs a Economic think tank in Islamabad posted to another group... EC member

For the benefit of those who still can't seem to figure out what PTI's policies are - either through a lack of information or an excess of anti-IK prejudice! - here is a sampling of just one area I have been involved in - tax reform.

Some of the measures already undertaken or in the pipeline over the next 2 months IA:

1. Tax policy separated from tax administration (pending for 15 yrs)

2. A full-fledged organisation development program launched for FBR with help of World Bank, DFID, McKinsey and HMRC. (I had proposed this 10+ yrs ago -was on hold till now).

3. Third party audit of PRAL undertaken. PRAL to be made autonomous with an independent board.
(Pending for last 10+ years).

4. Formal access protocols signed with third-party database providers for FBR to access information on potential high net worth taxpayers.

5. Leading data scientists engaged from Harvard, LSE, Oxford to develop algorithms and analyse data

6. A new board formulated and notified to run FBR. Includes professionals, academics etc.

These are just some of the measures already undertaken Alhumdulillah.
Lets have evidence-based criticism rather than rhetoric and polemics.

The above reforms in tax have been replicated in:

1. Export promotion/ease of doing business
2. Agriculture
3. Financial sector (this will take more time) incl housing finance
4. Tourism
5. Software exports
6. E-govt

In all honesty this is the collective work of a very large and very dedicated team.
Credit though goes to one person ultimately - IK. I am no fan of personalities/cults, but it has been a privilege and honour to serve his govt.
I have been in advisory capacity to 4 successive govt's since 2004 - never seen a more honest, incorruptible and hard working head of govt.

Riaz Haq said...

#Pakistan to impose ‘sin tax’ on #cigarettes, sugary #beverages. #Tax revenue to be used to boost #health budget.

After continued lobbying by civil society, Minister for National Health Services (NHS) Aamer Mehmood Kiani announced on Tuesday that soon a ‘sin tax’ will be imposed on cigarettes and sugary beverages.

Speaking at a public health conference at the Health Services Academy, Mr Kiani said that the PTI government was committed to increasing the health budget by five per cent of GDP.

“Various routes will be used to increase the health budget,” he maintained, “and one of them is imposing a sin tax on tobacco products and sugary beverages. That sum will be diverted to the health budget.”

Currently, the government spends a mere 0.6pc of GDP on health. It has been suggested several times in the past that sin taxes be imposed on products that cause health-related issues as a result of which the state pays heavy penalties in the shape of healthcare spending and lowered human productivity.

Talking to Dawn, the director general of the NHS Ministry, Dr Asad Hafeez, said that tax on tobacco and sugary beverages was being charged in some 45 countries.

“A sin tax is an internationally recognised term and is specifically levied on certain goods deemed harmful to society, for example tobacco, candies, soft drinks, fast foods, coffee and sugar,” he said.

“The United States charges about $1.5 (approximately Rs200) per pack of cigarettes, while the UK charges 40 pence (around Rs100) per litre of sugary beverages as sin tax. Thailand, as well as a number of other countries, has similar taxes that are earmarked for healthcare services.”

Replying to a question, Dr Hafeez explained that India imposes a sin tax on gutka and paan masala, and the sums thus collected are spent on the healthcare sector since these products cause illnesses that become a burden on the public exchequer.

“We have not yet decided on the exact amount for a sin tax [in Pakistan],” he clarified, “but it will certainly be a handsome sum. Because of the new tax, the price of cigarettes will increase, making it more difficult for young people to buy them. Some 1,500 youngsters start smoking in Pakistan every day, and we want to reduce that number.”

The general secretary of the Pakistan National Heart Association (PANAH), Sanaullah Ghumman, told Dawn that his association had for many years been demanding the imposition of a sin tax.

“Recently, during a meeting with President Dr Arif Alvi, we again raised the issue of such a tax,” he elaborated. “The minister for health was also present at the meeting, and the president assured us that he would do what was possible. The proposal was floated during the tenure of the former government as well, but was unfortunately not implemented. And even now, I fear for its fate since it is difficult to take such a decision in the face of an influential tobacco industry.”

To contextualise, according to a report of the NHS Ministry that was published a few years ago, tobacco is the single largest cause of preventable illness and death. In Pakistan, it causes some 108,800 fatalities every year, ie 298 per day. The report emphasises that the consumption of tobacco will continually increase the country’s healthcare expenses, in addition to imposing huge costs in terms of human resource.