by: Haseeb Chowdhry (Middle Eastern Chair- International Business Association)
Despite Benazir Bhutto’s assassination and growing concerns over US involvement in Waziristan, Pakistan’s financial markets have surprisingly done well over the past few months. Projections estimate Pakistan will experience approximately 7% growth in 2008 and accoding to Morgan Stanley's Emerging Markets Index (MSCI), Pakistan has been least effected by the global equity bust that has pulled share prices down in Japan, Singapore, India, and Thailand. Mark Matthews of Merrill Lynch calls it “the greatest information-arbitrage opportunity in the world.” Pakistani companies have high dividend yields of 4% and low price/earnings multiples, thereby signaling that there remains ample opportunity for foreign investment to pour into the equity markets. However, foreign concern for instability mitigates these possibilities much to the detriment of Pakistan. In addition, chronic instability remains as Pakistan remains a crucial element of the US led war on terror.
Foreign investors still see the Karachi Stock Exchange (KSE) with marked skepticism. One western bank based in Pakistan reports approximately $330 million was invested by foreign investors from July 1st until November 2nd which was the day before emergency rule was established. The same bank estimates that more than $400 million has been divested from Pakistani stocks by foreign investors since November 3rd. Domestic investors and bargain hunters who are accustomed to conditions in Pakistan covered most divestments by FIIs with the hope of long term growth and stability within Pakistan and South Asian region. As a result, internal capital has been a key driver to mitigating losses in times of instability. Foreign investors want to see a stable environment where their capital can grow consistently Pakistan’s current internal scenario is in no way conducive to establishing a “stable environment” in the short term.
Pakistan’s energy and banking industries have performed very well on the KSE. Energy companies such as the Oil and Gas Development Company (OGDC), Pakistan Oilfields (POL), Pakistan State Oil (PSO) and Pakistan Petroleum Ltd (PPL) reported rising profits. In addition, Pakistani banks are driven mainly by rising returns as well as growing interest of foreign banks in the relatively underdeveloped Pakistani banking sector. Standard Chartered and ABN Amro have both bought private Pakistani banks and merged them with their existing operations in the country. However, the main problem lies in the uncertainty of Pakistan’s political future and the looming threat to the west where American and Pakistani troops still combat Taliban militants. Recent allegations by Pakistan’s ISI were made against the US for allegedly bombing Waziristan from Afghanistan. In addition, US election candidates such as Barack Obama have often cited the possibility of sending US troops to infiltrate Waziristan to “eradicate” the Taliban forces. The question arises: does the US want to start another insurgency? Foreign investors are bound to be risk averse given Pakistan’s precarious position. But, even with elections coming up in Pakistan, it will take time to establish the same semblance of stability Pakistan had prior to the sacking of the Chief Justice, declaration of a state of emergency, and Benazir Bhutto’s assassination.
are taking middle to long-term approaches when looking at Pakistan’s viability
for foreign investment. They are waiting for the February 18th
elections to transpire and will act accordingly. Uncertainties remain about
Pakistan’s role in the series of past controlled and un-controlled events. The
war on terror puts Musharraf in a negative role domestically, which directly
leads to civil unrest and terrorism. To combat terrorism, Musharraf must take
extreme measures in light of recent criticism of the international community.
In addition, it must be understood that elections are not an inevitable path to
democracy and stability within Pakistan. In light of such changes in Pakistan,
foreign investors rightly prefer to hold on to cash and invest elsewhere in the
region as no viable solution is seen in the immediate horizon.
We can only wait and see.
Pakistan’s Stockmarket. (London: The Economist, January 24, 2008)
Bokhari, Farhan. Foreign Investors Play Waiting Game in Pakistan. (New York: The Financial Times, January 27, 2008)
Bokhari, Farhan. US Denies Missile Attack in Pakistan. (New York: The Financial Times, January 30, 2008)
Bokhari, Farhan. Pakistan Rejects US Military Role. (New York: The Financial Times, February 6, 2008)