The local capital market is bracing for a fresh setback as the management of a Saudi firm is reported to have finalised deal with Pakistani companies for the sale of former’s stakes in Hub Power Company Limited (HUBCO). The market observers are foreseeing a gradual plunge of at least 2000 points in the benchmark, KSE 100-share index, as soon as the latest outflow of portfolio investment unfolds its implications.
140 million stakes sold out: Xenel Industries Limited, Jeddah-based second largest shareholder in HUBCO after National Power International Holding BV, is said to have sold out its 140 million stakes in the power giant at Rs37 per share. This means an outflow of at least $455 million or Rs5.180 billion that, the market observers believe, would further pressure the country’s foreign exchange reserves which so-far stand at a comfortable level of above $17 billion. “We have 12 per cent shares in Hubco that are being disposed off,” Xenel’s industries Chief Financial Officer, Ashraf Tumbi, had told Pakistan Today Sunday. The sources said those acquiring Xenel’s shares are the state-owned listed institutions including National Investment Trust (NIT), National Bank of Pakistan (NBP), State Life Insurance and the Employees’ Old-Age Benefits Institution (EOBI).
Deal finalised: “The deal has been signed and is likely to be notified to the stakeholders tomorrow evening,” an analyst at Karachi Stock Exchange told Profit. While elaborating the reasons for this decision, analysts cited the lingering circular debt issue and an uninterrupted depreciation of rupee against the dollar. “The Saudi investors want to avoid further losses that they have incurred since 1995 on account of rupee’s devaluation,” the analyst said. The analyst said when the Saudis had acquired stakes in Hubco in 1995 that the rupee was standing at Rs34 against a dollar. “Now a dollar is sold at 88 rupees, the Saudis might be afraid of further contraction in the value of rupee that some people say might depreciate to Rs100 a dollar,” he explained.
Disastrous impact for equity market: “The time has come to take this decision,” the Xenel CFO had replied when asked about the company’s decision for a pullout. About the possible impact, another observer recalled that this outflow of over Rs5 billion was not an ordinary development. “In the past, the creation of a Rs5 billion fund by the NIT had added 5000 points to the index,” he said. The analyst said now when the benchmark was staggering at 12,000 points, one should expect a 2000-point plunge after the latest Rs5 billion outflow. Further, the benchmark for the sale deal was to be Rs40, the current market price of Hubco’s share, but the sources said the declaration of a 3-rupee dividend by the company and the purchase of “ex-dividend” by the buyers reduced the per share price to Rs37. –
KSE profitability since 2008: The profits of Karachi Stock Exchange (KSE) have shrunk phenomenally by over 93 per cent since the 2008 crash that, the market participants believe, had resulted in the retail investors from fleeing what was once the most liquid equity market of the region. KSE’s audit report for the calendar year 2011, which was released on Tuesday, shows that the yearly profits of the Exchange had contracted by over Rs722 million during the past four years.
Declining liquidity: According to the report, the KSE’s profit which had aggregated to Rs772 million in 2008, had contracted to Rs50 million only during 2011. KSE, the country’s largest capital market, depends on a 0.1 per cent commission, locally called “laga”, for calculating its profits. The audit report has revealed that since 2008 the KSE had been seeing a constant decrease in its profits which stood at Rs772 million in 2008 and then kept shrinking to Rs314 million in 2009, Rs68 million in 2010 and Rs50 million in 2011.
Share volumes decline by 540 million: “The KSE’s profits and turnover are interlinked and a continuous decline in the turnover reflected on KSE’s profits,” said an analyst at the Karachi stock. The analyst said on average the daily share trading at KSE used to be 620 million shares in 2008, but had now come down to a meager 80 million, thanks to the 2008 market crash, unpopular taxes on capital gains and irrational regulatory tightening by the regulators. “The 2008 crisis had badly shattered confidence of the investors, particularly that of the retailers,” he added. Then came the controversial 10 per cent Capital Gains Tax (CGT) which, the analyst said, made the individual investors flee from the stock market.
Capital Gains tax: According to Zafar Moti, an elected member at the KSE Board of Directors, the controversial Capital Gains Tax (CGT) was the “final nail in the coffin” of the volumes-starved KSE. The senior broker also believes that an unnecessarily tight regulatory framework of the securities and exchange commission of Pakistan (SECP) was another factor keeping the investors aloof from the capital market. About value of the KSE’s assets including the profits, Moti said reducing turnover at the Exchange was the sole reason for devaluation of the KSE’s belongings.
Current Account deficit
Unlike previous year the first quarter of current financial year saw the country’s current account deficit widening to 2 per cent of the Gross Domestic Product (GDP) against 1.1 per cent of the corresponding period last year. The economic observers foresee enough pressure on the so-far comfortable foreign exchange reserves that, they say, would further affect the rupee-dollar parity. According to State Bank data released on Tuesday, during July-September FY12 the country’s current account deficit widened by over 102 per cent or $612 million to $1.209 billion against a deficit of $597 million the country had faced during the same quarter last year.
The further widening of current account deficit, the analysts say, is attributable to a noticeable deficit of 35 per cent or $1.045 billion in the country’s trade balance. A breakup shows that whereas the exports rose by 17 per cent or $ 900 million to $6.141 billion during the period under review, the country’s import bill saw a significant increase of 27 per cent or $ 1.945 billion. During the said quarter, the country paid $6.141 billion against last year’s $5.241 billion on account of exports while the import payments accounted for $10.178 billion, $1.945 billion up when compared with $8.233 billion paid by the country during 1QFY11.
“In July 2011 it was more than clear that due to fall in the international prices of cotton and a host of other reasons, the country’s exports would be much less in FY12 compared to FY11,” viewed Dr Shahid Hassan Siddiqui. The economist said the present 102 per cent rise in the deficit was well up to the expectations. “It was obvious that the current account balance would record a deficit this year. Notwithstanding that it was a surplus in last financial year,” Dr Shahid told Profit. About the possible implications, the analyst said, “This would result in pressure on the country’s foreign exchange reserves and the rupee–dollar parity”.
This deficit was despite the increasing worker remittances that, according to central bank statistics, accumulated to $3.297 billion during the first quarter. This depicts an upsurge of $651 million or 24.6 per cent when compared with $2.646 billion remitted by the Pakistani compatriots last year. Foreign disbursements also remained negligible at $246 million, marking a decline of 60.5 per cent or $377 million against $623 million of corresponding quarter in FY11. All of the $246 million disbursement came to the dollar-hungry country under long-term project loans, whereas the short-term programme and commercial loans remained zero during this period.
The state bank data also shows that during the quarter the government had repaid $420 million, $320 million under long-term and $100 million under short-term liabilities, to its foreign lenders. The analysts estimate that if the current account kept widening at the current pace the country would end up at an annual deficit of $3.6 billion that would serve a severe blow to its dollar reserves. The analysts also warn that some big debt repayments, prominently that of the IMF to be started from second quarter, would eat up the country’s current holdings of the greenback.
This will be an set back .
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