Profit PSX ROARS TO LIFE AFTER GOVT MANAGES TO SECURE IMF DEAL In partnership with
Rs 40.00 | Vol XIV No 4 I 40 Pages I Islamabad Edition
Tuesday, 4 July, 2023 I 15 Zil Hajj, 1444
ABNORMAL ACTIVITY LEADS TO TRADING HALT WITHIN 10 MINUTES OF STOCKS’ OPENING
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PROFIT
DAY MARKS HIGHEST-EVER TRADING AT PSX IN A SINGLE DAY
SHAHNAWAZ ALI
HE Eid weekend may have ended on Sunday for the rest of the country, but the festivities were only starting early on Monday morning on the Pakistan Stock Exchange (PSX). The rush on the trading floor was expected with the announcement of a stand-by agreement being signed between the government and the IMF on Friday. But when the dams broke, it was almost too much for the exchange to handle. Trading had to be halted 10 minutes after the markets opened due to abnormally high activity. The stock exchange that had forgotten the light of a trading day in action for almost a year, was overjoyed with activity and liquidity as the markets opened this morning. For a number of months, the market had little to no availability of funds, owing to uncertainties regarding the country’s economic future. Not only was there a liquidity draught, uncertainty reigned, owing to the difficult business climate. With the restrictions being lifted, and a 9 month Staff Level Agreement being signed with the IMF, a bull-run on Monday was always on the cards. As predicted, the market saw a spike of around 2,230 points in the benchmark KSE 100 index at opening. Within minutes, the increase was standing above 5.4%, the highest ever single day increase the stock market had ever seen. Why did the Market halt? The Pakistan Stock Exchange (PSX) has got rules in place to control extreme fluctuations in the stock market. If the KSE-30 index, which measures the performance of 30 major stocks, increases or decreases
Has the PSX seen a rally like this before? ANALYSIS
PROFIT
ZAIN NAEEM
As the stock market opened on the 3rd of July 2023, the index increased by 5.99% or by 2,481 points. This is the single highest gain the market has seen in its history. It was the first time that the market was halted based on the index increasing by 5% in less than half an hour. Halts on the market are nothing new. The market had actually halted three times during the Covid19 pandemic but this is the first time that a positive rally had triggered a market halt. The sudden surge was expected of course, given that a deal with the IMF was finally struck on Friday and the threat of default was avoided. But there are many other factors to consider in this equation, and a look at recent history may help us contextualise this run of the bulls. For the past six years the stock market has been in a general negative spiral. Since touching an all time high of 53,127 on the 22nd of May 22nd 2017 the sentiment has continued to go south. With lack of any substantial trigger, this trend has continued. This was made worse during Covid as it seemed that this feeling of doom and gloom was going to persist. The index reflected this as it was range bound between 40,000 and 50,000 for most of the last three years. This was, of course, an oddity of the stock market. Pakistan managed the pandemic quite efficiently and corporate results were largely exceptional in this period. Despite this the stock market did not reflect any of these factors. Investors lost interest and as a result volumes dried up and share prices remained low. The index had plummeted to 28,289 at its lowest point which meant that nearly 50% of the market capitalization had been wiped away. This saw many leading scrips and companies losing price as well. Even when corporate performance began to rebound the market did not mirror this improvement. This left the market being undervalued which was one of the reasons a rebound would prove to be a jumping point for the index. After the vote of no confidence in April 2022 and the political uncertainty that followed, the depression in the market solidified. As the political situation deteriorated, so did the sentiment in the market and prices stayed stagnant. Things became worse as the word default was suddenly on everybody’s lips and matters with the IMF seemed to have soured.
by 5% from its previous closing value, trading will be temporarily halted.If the KSE-30 index continues to trade at a 5% increase or decrease for five consecutive minutes, trading in all stocks gets halted for a specified duration set by the exchange. During this halt, equity and equity-based derivative markets are suspended. During the halt, the National Clearing Company of Pakistan Limited (NCCPL) is supposed to collect margins, including any losses from mark-to-market valuations, from its clearing members according to regulations. Only those clearing members who have deposited the required margins with the NCCPL will be allowed to trade once the market reopens for the day. It’s important to note that the market halt rule will not apply if the KSE-30 index moves beyond 5% in the period before the market closes, as specified by the exchange. That period currently stands at 75 minutes. These measures have been introduced to manage extreme volatility in the stock market and provide stability to investors. By temporarily pausing trading during significant market movements, the aim is to prevent excessive price fluctuations and ensure a more
controlled and orderly trading environment. What next? After the resumption of the trading session, up until the filing of this piece, the KSE100 index stands at a 5.8% increase from its closing value. At its peak the index had touched 43,933 points which is an almost 6% increase. This is by far the highest single session jump in the KSE 100 index in the history of Pakistan. Talking to Profit, Tahir Abbas the head of investment research at Arif Habib Limited says that, “The rally is primarily due to the staff level agreement on the IMF Stand by Agreement signed last week. The momentum and sentiment is very positive given that the country now has clarity with respect to the economic roadmap ahead for the next 9 months.” But will the market remain this way? Are the current levels of stock prices here to stay? Explaining in further detail, Fahad Rauf, the head of Equity research at Ismail Iqbal securities, told Profit that what we are currently observing is a “knee-jerk reaction” to the expected future stability given by the IMF program. He says that in such circumstances a positive growth is seen across the board however, in the longer run only companies with strong fundamentals will sustain their levels and the market will correct itself accordingly in days to come. Answering a question about the economy, Rauf says that, “The IMF tranche restores the investor’s confidence to bring back their capital into the market which they had otherwise taken out owing to our gloomy economic outlook. However, for a sustained growth of the economy and the correct effective valuation of the stock market the government needs to work on structural issues, like the SOEs, power sector and the unequal taxes.”
Pakistan urges Sweden to take ‘serious action’ against desecration of Holy Quran ISLAMABAD
STAFF REPORT
Prime Minister Shehbaz Sharif on Monday asked Sweden to take “serious action” against the desecration of the Holy Quran and demanded that a proper investigation should be conducted into the incident “without any interference”. The premier’s remarks come after a man desecrated the Holy Quran in Sweden’s capital Stockholm last week, resulting in strong condemnation from several states, including Pakistan, Turkiye, Jordan, Palestine, Saudi Arabia, Morocco, Iraq and Iran. Sweden’s government also condemned the incident, calling it an “Islamophobic” act. A day earlier, the 57-state Organisation of Islamic Council (OIC), in an “extraordinary” meeting in Saudi Arabia, said collective measures were needed to prevent acts of desecration of the Holy Quran and international law should be used to stop religious hatred. It also urged member states to “take unified and collective measures to prevent the recurrence of incidents of desecration of copies of the” Holy Quran. Addressing the federal cabinet on Monday, PM Shehbaz said the Pakistani people and government condemned the “disgusting incident” that took place in Sweden. “Unfortunately, this is not the first incident to take place … such heart-wrenching incidents have taken place previously as well. They highlight that Muslims in Sweden, who are a minority, are facing Islamophobia and hatred,” he said. “The Pakistani government condemns this narrative made of hatred and discrimination,” he asserted and urged the Swedish gov-
ernment to take action. Referring to the OIC statement released on Sunday, PM Shehbaz said the council also demanded that the culprit should be “heavily investigated” and such incidents should be prevented in the future. “Pakistan’s government supports the OIC decision and hopes that nothing as such would take place in the future,” he stated, adding that the Foreign Office would follow up on the matter. PM LAUDS COAS ROLE IN SECURING $3 BILLION FROM KSA, UAE: During the cabinet meeting, the Prime Minister also heaped praise on Chief of Army Staff (COAS) General Asim Munir during a cabinet meeting for his “key role” in securing $3 billion from Saudi Arabia and the United Arab Emirates (UAE) that eventually contributed to securing the International Monetary Fund (IMF) bailout. “Army Chief General Asim Munir played a key role in bringing $2 billion from Saudi Arabia and $1 billion from the UAE,” the premier told the cabinet meeting. He briefed the cabinet about the nine-month standby agreement
that his government reached with the Washington-based lender last week. He also thanked IMF Managing Director Kristalina Georgieva for her role in the bailout package. “The first instalment from the IMF will be received in July,” PM Shehbaz told the ministers. He added that China helped Pakistan several months before the deal just like it has done in the past, adding that if Beijing had agreed to roll over $5 billion then things would have been different. “If the deal with the IMF had not been settled then the matter would have been different,” he added. However, the prime minister said that the nine-month agreement was a “temporary relief” for the country, adding that it was a moment of concern, not a matter of “pride”. He also urged all the national institutions to make concerted efforts to rid the country of loans and put it on the course to progress. “While keeping in their respective jurisdictions, the institutions should make united efforts for at least the next 15 years to address the country’s economic woes,” he went on to say.
IN TODAY’S ISSUE
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After 7 months, inflation sees a dip. But is it a cause for celebration?
irfan.farooq@pakistantoday.com.pk
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WHILE IMPROVEMENT IN HEADLINE YOY NUMBERS IS EYE-CATCHING, THEY ARE PRIMARILY BASED ON A STATISTICAL ARTEFACT PROFIT
UROOJ IMRAN & GHULAM ABBAS
In the midst of back breaking inflation, there seemed to be some good news on the offing on Monday when it was revealed that the rate of inflation in the country had fallen month on month in June 2023. So what is going on and is this a cause for celebration? The federal government and finance minister Ishaq Dar would have you believe so. Fall in inflation and its reasons The latest data released by the Pakistan Bureau of Statistics (PBS) for June 2023 showed that inflation clocked in at 29.4 percent year-on-year compared to 21.3 percent in June 2022. This is the lowest annual increase in prices in some months, with January 2023 inflation recorded at 27.6 percent. On a month-on-month basis, inflation declined to 0.3 percent. Experts have attributed this decline to two main factors: the stabilization of the US dollar and a decrease in commodity prices. The food group, which holds a substantial weight of 34.58% in the inflation reading, remained a major driver behind the decrease, with a 1% fall in June 2023 compared to May 2023. “While the improvement in these headline year-onyear numbers is eye-catching, they are primarily based on a statistical artifact: there had been an extreme jump in price levels in June last year,” Dr Ali Hasanain, associate professor of economics at the Lahore University of Management Sciences (LUMS), told Profit. “The May YoY inflation increase reported a larger jump because prices in May last year had been lower; in contrast, the June YoY increase is smaller because June last year already had much higher prices. This is reflected in the more muted decrease in inflation (-0.3%) reported in month-on-month terms,” he explained. This is what is called a high base effect. To put it into perspective, the CPI figures for May and June 2021 were 145.24 and 144.82, respectively. Compare this to 2022 when CPI for May was 165.23, whereas the figure for June was 175.71. In 2023, the CPI figures for May and June stood at 227.96 and 227.37, respectively. So, May 2023 (figure) compares to May 2022 (figure) and June 2023 to June 2022. Since inflation compares the CPI figure for any given month to the same month of the previous year, ignoring or misunderstanding the base effect can lead to erroneous conclusions. Dr Hasanain said the government would be welladvised to manage expectations carefully. “First, prices in the economy are still rising faster than they have risen in years – excluding the even worse numbers of the last four months. This is the time to roll up our sleeves and fix this crisis, not to celebrate. “Second, having reached a deal late last week to enter into a nine-month IMF Stand-by Agreement (SBA) and with a subsequent program all but certain to be necessary, the government cannot afford to provide short-term ‘relief’ at the expense of macroeconomic fundamentals.” The first signs of this “increased discipline” were seen on Friday, when Dar announced that the tax on petrol would be increased slightly (leaving prices unchanged), diesel prices would be raised (without a change in taxes), and that electricity tariffs were likely to see an increase during the ongoing month, Dr Hasanain said. “These measures are important for staunching the bleeding of the country’s finances in the short-term, but will likely impact inflation in the months ahead. “Broader reforms improving efficiency are crucial to lighten the burden of ever-higher prices for the country’s citizens.
Fitch and Moody’s sound alarm despite IMF deal CONTINUED ON PAGE 03
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BOTH ORGANISATIONS CITE NEED FOR ADDITIONAL FINANCING, UNCERTAINTY REGARDING DEBT REPAYMENT AND FUTURE IMF PROGRAMMES PROFIT
STAFF REPORT
In a recent development, Fitch Ratings and Moody’s Investors Service have raised concerns about ongoing economic risks for Pakistan, despite the country securing a crucial $3 billion lifeline from the International Monetary Fund (IMF) over the weekend. Pakistan entered into a short-duration (nine-month) $3 billion loan program with the IMF last week, following the revival of the $7 billion program that was originally set to end prematurely on the same day.
The primary objective of the program is to provide the necessary foreign exchange to resume imports, support listed companies in gradually reopening partially closed production, and reinvigorate economic activities in the country. This new IMF program has also served as a signal to other donor agencies and friendly countries, prompting pledges of $9 billion at a Geneva meeting in January 2023. However, both Fitch and Moody’s cautioned that risks persist for the South Asian economy, particularly as the government faces a challenging $25 billion debt repay-
ment hurdle in the upcoming fiscal year starting in July. Krisjanis Krustins, Director of Sovereigns for APAC at Fitch, emphasized that Pakistan will require significant additional financing beyond the IMF disbursements to meet its debt obligations and fuel economic recovery. There is a concern that the current financing might prove insufficient, especially if current account deficits widen again. To secure the initial agreement with the IMF, Pakistan implemented measures such as tax increases, spending cuts, and raising its primary interest rate to a historic peak.
While the agreement was initially well-received by the markets, leading to a surge in stocks and a strong performance of dollar bonds, it still awaits approval from the IMF Executive Board. Moody’s analyst Grace Lim, based in Singapore, expressed uncertainty regarding Pakistan’s ability to secure the complete $3 billion IMF financing during the stand-by period. She highlighted that the government’s commitment to ongoing reforms will face a test as elections are scheduled for October 2023. Pakistan had previously obtained a $1.1 billion loan in August, which was subse-
quently halted due to non-compliance with certain conditions stipulated by Islamabad. The towering $25 billion debt repayment, encompassing both principal and interest, is nearly seven times Pakistan’s foreign exchange reserves, according to Moody’s. Lim emphasized that only after the elections will it become clear whether Pakistan will be able to enter into another IMF program. She warned that until a new program is agreed upon, Pakistan’s ability to secure loans from other bilateral and multilateral partners on an ongoing basis will be severely constrained.