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That is how it works in India Page 2 Leveraging indigenous economic potential Page 3 Ambiguity on the political front keeps investors at bay Page 6 Pages: 8

Monday, 21 November, 2011

chamber urges Lengthy pen work Islamabad govt to tackle declining FDI keeps investors away from stock markets n ISLAMABAD

StAff RepoRt

eGAtive growth in Foreign Direct investment would adversely affect the country’s economic growth as FDi plays vital role in development of the country. islamabad Chamber of Commerce and industry (iCCi), President Yassar sakhi Butt, in a statement urged government to take remedial measures on urgent basis to reverse this trend to attract more foreign investment. He said the grim condition of Foreign Direct investment in the country fell to $239.4 million during July-October period of 2011-12 against $610 million inflows noted during the same period last year; a decline of 61 per cent which would carry negative impact on Pakistan’s economy. iCCi President said foreign investment

KSE, SECP dispute over additional details in account opening form g 20-page form requires investors to subscribe on 20 places g




itH controversial Capital Gains tax (CGt) and politico-security uncertainties being oft-referred persistent reasons for fast depleting trading volumes at Karachi stock exchange (Kse), unnecessarily long and complicated account opening procedures also appear to be a factor that keeps the investors away from the equity market. Kse management is currently at loggerhead with regulators from securities and exchange Commission of Pakistan (seCP) over what an elected director on former board termed it “additional details” sought by commission from investors in its Account Opening Form (AOF). “seCP’s form requires investors to provide so much additional details that their interest to invest on the already volatile stock market fades away. it is discouraging,” said Abid Ali Habib, chairman Abid Ali Habib securities and one of 10-member Kse Board of Directors. Habib stated this while talking to a group of journalists who were invited at Kse Friday afternoon to interact with a visiting indian delegation of journalists, who had “stuck up” at their prior meeting place, MQM’s headquarters, nine Zero. referring to the latest Kse board’s meeting with seCP officials, led by Musarrat Jabeen, director said seCP had come up with a new and lengthy AOF in which extensive details had been sought from the investors. “it’s a 20page form requiring the applicant to read its thorough terms and agreements in at least two days,” director said. Habib went on to say the new form needed investors to subscribe on at least 20 places. Kse director said in addition to their Computerised national identity Cards, applicants were also required by AOF to give additional detail like their

Conference to strengthen regional economic connectivity ISLAMABAD

M driving license (if any), details of their house whether rented or personal possession and salaries or income of applicant’s spouses and so on. “Why an investor, wanting to invest, starting from a meager amount of rs10,000, would bother to provide all these details,” director wondered. Habib said a friction of 180 million Pakistanis, numbering 2 to 2.5 lac, was currently maintaining accounts with Central Depositary Company (CDC) that also include those who had only filled form and never traded then. Practically, Kse director said, 50,000 account holders were trading once a year, while only 10,000 account holders were actively participating in the share trading. “if we ask for such long details the existing traders would too

flee the market,” he warned. According to Habib, Kse side argued that risk-averse investors, who usually turn to stock market in search of higher margins under philosophy of “greed and fear”, should be provided with documentation work that is not that lengthy and complicated. When asked for rationale, seCP officials were citing for new inclusions in AOF, Kse director said they were just following orders. “What can we do, we have orders from above,” Habib quoted seCP official Musarrat Jabeen as saying. He, however, said regulators had assured his side of more deliberations on the issue. “seCP has noted our reservations and assured that they would deliberate on the matter,” director said.


inisters from 10 countries spanning the Caucuses, and Central, east and south Asia will gather to mark a decade of achievement, including $17 billion of investments in energy, trade and transportation under Central Asia regional economic Cooperation (CAreC) Programme. Finance minister Dr Abdul Hafeez shaikh is likely to lead Pakistan in CAreC 10th Ministerial Conference at Baku, Azerbaijan, starting from 22nd november till 24th november. it’s the first time that Pakistan is attending CAreC ministerial conference as a full member country. established in 2001, CAreC brings together Afghanistan, Azerbaijan, People’s republic of China (PrC), Kazakhstan, Kyrgyz republic, Mongolia, Pakistan, tajikistan, turkmenistan, and Uzbekistan. it promotes implementation of regional projects in energy, transport, and trade facilitation from northern PrC to Caucasus and europe, and from Kazakhstan to warm water ports of Karachi, Gwadar and beyond. CAreC partnership accounts for more than 120 projects to date, including six extensive transport corridors and energy networks that are beginning to improve lives

MFN not to harm local industry g

Pakistan has safeguarding measures to protect its industry KARACHI


is considered an important source of development for a country; therefore, government should accord high importance to encourage foreign investors by creating investment friendly environment to accelerate the pace of country’s economic progress. He said key issues including power shortage, poor infrastructure, law and order situation and other vital factors, should be addressed on priority basis to improve the bleak foreign investment condition to put the country on track of economic growth and development. He said Pakistan is an attractive market for producers and many sectors of the economy including, oil and gas, power generation, agriculture, pharmaceutical, infrastructure development and many other sectors offer lucrative investment opportunities to foreign investors. Pakistan should not further waste time to loose the opportunities to attract foreign investment.


lMOst 80 per cent of the country’s trade bodies and business associations have shown fear of losing their domestic market after granting Most Favored nation (MFn) status to india. However, there are still safeguarding measures to protect local industry. Granting equal status to india, as Pakistan has already granted the same to other countries under the rules of World trade Organisation (WtO), was a mandatory subject for Pakistan. However, if islamabad is apprehensive of possible infiltration of exports from india, it can take measures, under WtO’s own provisions against such imports to protect local industry. According to a fresh report prepared by tDAP, article XiX of General Agreement on tariffs and trade (GAtt), provides that if a country finds a

product being imported “in such increased quantities and under such conditions as to cause or threaten serious injury to domestic producers” it can impose safeguard measures to restrict such imports for temporary periods. there was already an example of Us imposing safeguard measures against foreign imports in order to protect its domestic steel industry. report says idea of protecting domestic economy from ‘infiltration’ of indian products appears to be based on an assumption that all indian goods are more competitive than domestically produced goods. Opening borders for trade does not suggest an unrestricted flow of indian products. All indian imports into Pakistan will remain subject to tariffs already in place. it can also be argued that if indian goods remain cheaper than their domestic counterparts even after paying import duties, then why not allow them? Does it not auger well for ‘Consumer Protection’ out-

look for people of Pakistan? nevertheless, if it is felt that indian imports into Pakistan are increasing due to unfair practices like price undercutting etc, then Pakistan is free to restrict imports of specific products by increasing tariffs under various provisions of the WtO for example anti-dumping duties, countervailing and anti-subsidies etc. Furthermore, substitution of Pakistan’s imports with cheaper indian products should be more than welcome since this could benefit us in two ways: Firstly, low cost of imports and secondly, lesser time involved. Findings of trade diversion theory on indo-Pakistan trade relations suggest that Pakistan can save valuable foreign exchange of $1.5 billion to $2.0 billion in case Pakistan diverts imports of such items (Chemicals, steel, machinery, industrial equipments, plastics etc), which are not locally manufacture and have to be imported from far-flung markets like Brazil, Mexico, Australia, Germany. since these products are available from india at competitive prices and substan-

and livelihoods across the region. Asian Development Bank (ADB) has contributed $5.5 billion to total CAreC investment since 2001. ring road, rail and electricity projects in Afghanistan, and eastWest Corridor in Azerbaijan are flagship programmes that embody CAreC. About 4,000 km of road and 2,250 km of railway lines have been built or upgraded, opening up corridors of trade and opportunity. streamlined customs procedures are moving people and their businesses across borders faster and at less cost. electricity transmission lines and upgraded power plants are beginning to boost vital energy trade in the region that will bring prosperity and security. Ministerial conference will also launch CAreC 2020 as the new roadmap for the next 10 years. this will provide a blueprint to help countries expand trade, spur competitiveness in broader global economy, and reposition Central Asia as pivot of regional trade. six multilateral institutions support work of CAreC that includes ADB, european Bank for reconstruction and Development, international Monetary Fund (iMF), islamic Development Bank (iDB), United nations Development Programme (UnDP), and World Bank. ADB has served as CAreC secretariat since 2001.

tially cut-down transaction time and cost. Also, “strategic considerations” have been used to advocate denial of MFn to india. And, certain Pakistani manufacturers and businesses have also been preoccupied with ‘dooms day’ scenario that granting of MFn status to india will ‘flood’ Pakistan’s markets with indian goods and that it would mean a complete obliteration of Pakistani industry. Question of granting MFn status to india is perceived to be a long standing demand from india, whereas in reality it is an integral part of commitments undertaken by both countries under WtO agreements. Fact of the matter is that under articlei of GAtt 1994, all members of WtO are bound to grant MFn treatment to all other members, with respect to trade in goods. this makes it mandatory upon Pakistan to grant MFn status to india, as non-compliance constitutes a violation of WtO Agreement. india has not taken matter to WtO Dispute settlement Body. if Pakistan is waiting to respond when india does take MFn matter to Geneva, then it seems that Pakistan is illadvised, as in all likelihood the decision would be against it. Additionally, by not taking MFn matter to Geneva, india has already scored a ‘Moral victory’ which is already tilting global opinion in favour of india’s trade policies.

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Monday, 21 November, 2011


‘Believe me its not different in Pakistan’!



greater ‘hole in the wall’ you cannot imagine. A small fading sign on the top saying ‘Cellphoon reapars’ barely visible through the street vendors crowding the Juhu Market in Mumbai. On my way to buy a new Blackberry, my innate sense of adventure made me stop my car and investigate. A shop not more than six feet by six feet. Grimy and uncleaned. 4 ‘Can you fix a Blackberry?’ 4 ‘Of course, show me’

4 ‘How old are you’ 4 ‘sixteen’

He was no more than 10. not handing my precious blackberry to a 10 year old in unwashed and torn t shirt and pyjamas. At least if i buy a new one, they would extract the data for me. something i have been meaning to do for a year now. 4 ‘What’s wrong with it?’ 4 ‘Well, the roller track ball does not respond. it’s kind of stuck and i cannot operate it.’ 4 He grabs it from my hand and looks at it. 4 ‘You should wash your hands.

Many customers have same problem. roller ball gets greasy and dirty, then no working.’ look who was telling me to wash my hands. He probably has not bathed for ten days, i leaned out to snatch my useless blackberry back. 4 ‘You come back in one hour and i fix it.’ 4 i am not leaving all my precious data in this unwashed kid’s hands for an hour. no way. 4 ‘Who will fix it?’ 4 ‘Big brother.’ 4 ‘How big is big brother?’ 4 ‘Big …. Umm ..thirty.’ then suddenly big brother walks in. 30??? He

is no more than 19. ‘What problem?’ He says grabbing the phone from my greasy hand into his greasier hand. Obviously not trained in etiquette by an up-market retail store manager. 4 ‘normal blackberry problem. i replace with original part now. You must wash your hand before you use this.’ What is this about me washing my hands suddenly? 19 year old big brother rummages through a dubious drawer full of junk and fishes out a spare roller ball packed in cheap cellophane wrapper. Original part? i doubt it. But by now i am in the lap of the real india and there is no escape as he fishes out a couple of screwdrivers and sets about opening my Blackberry. 4 ‘How long will this take?’ 4 ‘six minutes’ this i have to see. After spending the whole morning trying to find a Blackberry service centre and getting vague answers about sending the phone in for an assessment that might take a week, i settle down next to his grubby cramped work space. At least i am going to be able to watch all my stored data vanish into virtual space. People crowd around to see what’s happening. i am not breathing easy anyway. i tell myself this is an adventure and literally have to stop myself grabbing my precious Blackberry back and making a quick escape. But in exactly six minutes this kid handed my Blackberry back. He had changed the part and cleaned and serviced the whole phone. taken it apart, and put it together. As i turned the phone on there was a horrific 2 minutes where the phone would not come on. i looked at him with such hostility that he stepped back. 4 ‘You have more than thousand phone numbers?” 4 ‘Yes!’ 4 ‘Backed up?’ 4 ‘no.’ 4 ‘Must back up. i do it for you. never open phone before backing up.’ 4 ‘You tell me that now?’ But then the phone came on and my data was still there. everyone watching laughed and clapped. this was becoming a show. A six minute show. i asked him how much. ‘500 rupees,’ he ventured uncertainly. People around watched in glee expecting a negotiation. that’s $10 dollars as against the rs30,000 ($600) i was about to spend on a new Blackberry or a couple of weeks without my phone. i looked suitably shocked at his ‘high price’ but calmly paid him. Much to the disappointment of the expectant crowd. 4 ‘Do you have an i-Phone? even the new ‘4D one? 4 ‘no, why” 4 “i break the code for you and load any ‘app’ or film you want. i give you 10 film on your memory stick on this one, and change every week for small fee” i went home having discovered the true entrepreneurship that lies at what we call the ‘bottom of the pyramid’. some may call it piracy, which of course it is, but what can you say about two uneducated and untrained brothers aged 10 and 19 that set up a ‘hole in the wall’ shop and can fix any technology that the greatest technologists in the world can throw at them. i smiled at the future of our country. if only we could learn to harness this potential. ‘Please wash your hands before use’ were his last words to me. now i am feeling seriously unclean.

MFN: A win-win move for Pakistan KARACHI



eCentlY, cabinet has decided in principle to grant Most Favoured nation (MFn) status to india that will boost trade ties between the two estranged neighbours. After months of confidence-building measures and peace overtures, the two neighbours are inching towards normalisation of relations. in the 28th september ministerial meeting in new Delhi, the two states committed to increase bilateral trade to $6 billion by 2015, compared to only $1.7 billion in 2011. sayed Ali, economist of standard Chartered Bank of Pakistan (sCBP) has observed this in his research report titled ‘Pakistan - a win win situation’. According to report, Pakistan agreed to grant MFn status to india, and india agreed not to oppose eU’s three-year tariff waiver on select commodities from Pakistan, mainly textiles from areas devastated by flash floods in 2010. intraregional trade in south Asia is lowest of all regions in the world, accounting for only 1.5 per cent of GDP compared to 7 per cent for east Asia and latin America. the benefits of more trade are significant in today’s global econ-

omy, which is characterised by weak growth in Us and eU, both major export markets for india and Pakistan. normalisation of ties between the neighbours will also improve investment climate in the region. From india’s perspective, developing export markets with Pakistan and the energyrich Central Asian states will counter weaker demand from the West, report said, adding,

1996, but Pakistan did not reciprocate because of opposition from vested power groups and the tense bilateral relations that followed nuclear tests in both states in 1998. While there is a growing realisation on both sides that peace in the region is critical for sustaining growth, there remains significant opposition to granting MFn to india. Hence, the government has signalled that it will

for the benefit of traders and industrialists in both countries. india has indicated that it will offer preferential access to textiles and other goods from across the border if Pakistan grants MFn status and initiates steps to boost imports from india. Proposals under consideration include allowing the entry of textiles and other goods from Pakistan at concessional or zero duty to boost trade relations.

According to the 2007 World Bank report titled ‘The Challenges and Potential of Pakistan-India Trade’, trade flows between the two countries are 400 per cent below potential owing to trade barriers and hostile relations. This is based on a standard gravity model used to estimate trade flows based on the size of economies and inversely related to the geographical distance between them it will also strengthen india’s role as an influential regional power, with an eye towards getting a permanent seat on the Un security Council. india’s fast-growing economy and expanding middle-income consumer market offers huge potential for Pakistani exports. in our view, higher trade could boost the economy by 0.4 per cent of GDP annually over the medium term on higher exports and higher transit trade revenue. india granted MFn status to Pakistan in

move forward in a structured manner. the first step will be to remove the ‘positive list’ – a list of 1,946 eight-digit Harmonised system (Hs) code items that india is allowed to export to Pakistan. this will be replaced by a ‘negative list’ – a much smaller list of banned items. this effectively gives indian exports the same status as MFn, but allows Pakistan to continue to protect select industries and sectors. this move will simplify the current trading regime and make it more transparent

However, non-tariff barriers remain the biggest hurdle for Pakistani exports. Huge potential for increased bilateral trade: in the 28 september ministerial meeting the two states committed to increasing bilateral trade to UsD 6 billion by 2015, compared to only UsD 1.7bn in 2011. this would assume annual growth of 60 per cent year by year in trade between the two neighbours. According to the 2007 World Bank report titled ‘the

Challenges and Potential of Pakistan-india trade’, trade flows between the two countries are 400 per cent below potential owing to trade barriers and hostile relations. this is based on a standard gravity model used to estimate trade flows based on the size of economies and inversely related to the geographical distance between them. the report states that bilateral trade could increase by 80 per cent if the two sides entered into a regional trade agreement similar to the south Asian Free trade Agreement (sAFtA) signed by the two states in 2006. sAFtA entails granting MFn status to india and removing all nontariff barriers to trade. According to our research, the indian economy is in a super–cycle, with the economy set to expand to UsD 30.3trn in 2030 from UsD 1.5trn in 2010, with annual average growth of 9.3 per cent. Per capita incomes are set to rise to over $20,406 in 2030 from $1,264 in 2010. this presents a huge market for Pakistani exports. if trade normalises and Pakistan is able to maintain its share of total indian imports to 0.2 per cent, exports to india would rise to $4.4 trillion by 2030 from $ 287 million in 2011. this would provide a significant boost of nearly 0.4 per cent of GDP annually to Pakistan over the medium term. if Pakistan increases its share in india’s total imports to 0.4 per cent, it would boost the economy by 0.8 per cent of GDP annually over the medium term.

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Monday, 21 November, 2011


Anti-capitalism mobilisation


Here are a number of ironies in the discontent exhibited in the Occupy Wall street movement and similar protests around the developed world. sure, it is a glaring public rebuke of the free market neoliberal model that has governed mainstream international finance, growing in popularity and application ever since the fateful collapse of the communist alternative. But at a deeper level, the mobilisation betrays growing public frustration with the basic ethos of democracy. increasingly with time, traditional distinctions between different parties and ideologies, that used to be final deciding factors in general elections, have become blurred. Be it America or established democracies in europe, whichever party comes to power is seen toeing the same neoliberal line, despite tall promises of change during campaigns. this phenomenon has increased since the ’08 financial crash that began with the collapse of lehman Brothers. Politicians on either side of the Atlantic are seemingly more concerned about hemorrhaging financial institutions than the

effect their fire-fighting is having on middle and lower income groups. seemingly, whoever people vote to power turn their attention to banks and financial institutions. it is also this frustration, and the fact that Wall street embodies the financial system breeding an ever widening rich-poor gap, that has led people to revolt. Apparently, one of the biggest flaws in modern western democracy is the need for contestants to bankroll expensive campaigns, with economic cover invariably coming from financial powerhouses. Once in power, returning the favour is inevitable. Only, in times of recession, this exercise becomes selfdefeating, since incumbents are visibly seen ditching the people that voted them to power in favour of their own financial patrons. now, with this charade having gone on for three years, people have realised the insincerity of those in charge of their fate. even as popular western media ignores the thousands protesting Wall street excesses in America, and unfair austerity across europe’s periphery, public mobilisation is set to change the world. For this shift to be soft and controlled, those at the helm of affairs must realise their folly, and ensure safeguarding

PC briefed on secondary public offering of PPL

Nashpa well two

All of the mentioned entities in the article and all the remaining entities including, Pakistan steel, Pakistan railways, PiA etc must be privatised as early as possible. But this should be done in a transparent manner in order to make these ventures profitable not only for the stake holders, but also for the benefit of government, so that it can get rid of the liability of billions of rupees every year. it is not the job of government to run industries /commercial enterprises, nor are they capable of doing so. they only need to confine themselves to being regulators and facilitators.

i cannot believe that despite being so rich in oil reserves, we have to borrow nearly everything from foreign countries. nashpa well two’s discovery is not only a breakthrough for our power sector, more importantly it is a reminder for us as a nation that we do not have to rely on other countries to be self-sufficient. the fact that a gas discovery preceded the oil discovery means that we are strengthening on two fronts. i hope OGDCl continues to explore further opportunities and maybe one day we might be in a position where we would be exporting oil to other countries instead of importing it.

Leveraging indigenous economic potential

Javed Gillani


CCOrDinG to the state bank of Pakistan, sMe refers to an entity, ideally not a public limited company, which does not employ more than 250 persons in case of manufacturing, or 50 persons if it is catering to the services sector. Across the world, sMes are considered an engine of economic growth, both in the developed regions and the emerging economies. this is mainly due to the fact that these small and medium enterprises provide low-cost employment since they utilise indigenous home-based resources for production. the development of small and medium enterprises is of extreme importance mainly because they accelerate the rate of rural industrialisation and simultaneously work towards integration of the rural sector with the urban sector. in the case of Pakistan, not only have sMes provided employment to hundreds of thousands over the years, they have also served to promote the country’s cultural heritage in terms of skills and crafts. they support families and even bolster the weak export industry, reasons enough for the government to patronise them. sMeDA, along with sMe bank, has been working towards facilitating craftsmen/women for the purpose of setting up their own businesses in this regard. During a recent trip to Multan, my native hometown, i was overwhelmed by the sheer talent of our craftsmen/women who had created products that require great attention to detail and are loved by foreigners that visit Pakistan. Walking through one of the old bazaars of the

By tapping into the rich culture that defines us, in terms of local skills of our talented crafts people, we can engage a vast market

city, i came across blue tile work, or kashi gari as it is known, which made me realise the richness of our culture and how we can tap into it to promote not only the industry but also our image in this fast globalising world. Arts and crafts from Multan date back to the medieval period, and kashi work or blue pottery has earned the city international acclaim for its intricate designs and beautiful art work. this art work has survived centuries with each generation of craftsmen/women passing their skills on to the next. such has been the universal appeal of this craft that it is also displayed at the British Museum in london, among other places. And surely, this is not the only indigenous craft that has survived generation after generation in Pakistan, but what we need to understand is the fact that such small and medium industries need to be cherished and protected. the range of ceramics is not the only industry that requires our attention, and there are many others hand-made carpet industry of Pakistan being one of them. By tapping into the rich culture that defines us, in terms of the local skills of our talented crafts people, we can engage a vast market. According to the economic census of Pakistan 2005, 3.2 million business enterprises were functional in the economy out of which, 99 per cent of all enterprises were sMe’s. the share of small and medium enterprises in industrial employment according to some estimates stand at over 75 per cent. What the sMe sector of Pakistan increasingly needs is support in terms of resources such as capital and finance, but more than that it needs support in terms of how to manage their businesses effectively, and how to sustain growth in the long term. Most significantly over time, the importance and contribution to the economy of sMes has been enormous, which goes on to suggest that even today there remains huge untapped potential in the sMe sector that can be tapped into through appropriate support and promotion. As sMes grow over time, they require greater integration to the international export markets with capacities that are in accordance with internationally acceptable standards. to sum it up, there is vast potential but all that is required for sustainable sMe development in Pakistan is for all the concerned stakeholders to make collective effort to buttress this sector. in this regard, Business Development services are also required to ensure the internal capacity of these enterprises are improved. The writer is Chief Manager, SME Bank





Rise of NPLs

Aahyan Mumtaz


HAt i find astonishing is the surprise itself caused by news flows regarding the ‘alarming’ rise in nPls. People seemed astounded by the fact that defaults continue to rise given credit being extended to the private sector has virtually come to a standstill. still, this should not come as a surprise at all; defaults are emanating from already extended credit. this is because core issues of the economy are still intact resulting in a poor business environment, where the scarcity of

opportunities impedes debt repayment capacity. it should be common sense to see that problems are eventually going to be reflected in numbers as they have done so now. According to recent data released by the sBP, with an increase of six per cent, nonperforming loans of banks and DFis rose to a new high level of rs629 billion at the end of september 2011. the increase was much higher than second quarter of CY11, as an increment of rs5.54 billion was registered in nPls in the second quarter of CY11. this translates to a net nPl to Advances ratio of 6.53 per cent as compared to 5.48 per cent for the previous quarter. the increase in bad loans has been seen across the board – albeit not proportionately – as public sector banks have been hit by defaults the most. not to say much about the already known poor asset quality of public banks, it is still depositor money in these banks which is being impacted. But despite much hue and cry these vehicles still have leaks in terms of risk management systems which have existed for long

and very little willingness to plug them up. Keep in mind this is excluding the situation of the Bank of Punjab as it has not released its accounts for about two years now. Add this to the mix, the figures would most probably be thrown back a bit more. the reasons cited are nothing new; slow economic activity and high interest rates. When these two things are put together, it usually spells squeezing of debt repayment capacity. Borrowers are finding it difficult to execute the business activity they had acquired these loans for, engaging in a fight for survival and so not being able to afford financial costs. the key word here is affordability as interest rates where they are now are definitely not affordable. not to say that effort has not been made to resolve this, reflected by sBPs slashing of the policy rate by a big 150bps which has definitely provided some comfort to entities. notwithstanding, more needs to be done and further drops need to be seen both in the interest of the corporate borrower and bank alike. However, this is only one aspect. the

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Defaults are emanating from already extended credit

structural problems of the economy still exist in the form of power outages, namesake law and order, and tax policy issues. they need to be sorted if the ‘environment’ is to be improved. A hint of the problems faced by the banks have also been self orchestrated. stringent contingencies and tough conditions have proved to be restrictive in nature more than protective. Given the requirements banks put on borrowing, it is easy to see why companies feel stifled when paying up. On the other hand some blame should also be thrown at those ‘willful defaulters’ who carry an element of sinister intent at the time of repayment. Key here is that both the borrower and lender need to work together in a tit-for-tat arrangement which is the original essence of a borrowing arrangement. this is exactly where the solution to arresting rising nPls lies. Where corporate entities should not be disdainful towards public funds, banks should be more accommodating in nature as well. Where genuine problems exist,

these financial institutions should not turn a blind eye towards them but actually make an effort to sort problems out. A real-life example comes to mind where an entity, struggling for business opportunities, was pushed to close its operations. in line with the spirit of corporate behaviour, the entity repeatedly requested the bank for renegotiation of its lines – a plea which the bank took to ignore. the funds are stuck and the pains of legal suits are being borne now. Both ended the loser which would not have been the case if proactive action was displayed in a timely manner. similar examples are not uncommon and if taken care of would probably shave 100bps off overall toxic ratios. this is while other issues are slowly resolved. Unless this attitude is adopted, little can be expected other than the disappointment of another data supplement showing a further increase in nPls. The writer is a financial analyst with Pakistan Credit Rating Agency (PACRA)

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Monday, 21 November, 2011

The economy of the country has shown better performance during the first four months of the current fiscal year



Finance minister Dr hafeez Sheikh




OUtH Korea’s meteoric rise to the no 1 spot in the world shipbuilding industry has been aweinspiring. Following Japan’s example, which had used the shipbuilding industry as a catalyst to rebuild it’s industrial structure in the post World War ii era, it went on to outstrip Japan by 2003 in the three key categories of shipbuilding volume, order backlogs and new orders. By bagging new orders of up to $31.4b by mid-2011, it is way ahead of it’s nearest rival China with $8.8b. China, which had started replicating both the Japanese and the south Korean models with huge state – supported investments at the turn of the century, is however the market leader in terms of compensated gross tonnes.

NATIONAL STAKES shipbuilding, which is global in nature, is a multi-billion dollar industry. Many developing economies have over the years taken giant strides in this field by classifying it as a strategic industry, by virtue of which they have been able to inject generous doses of government subsidy to the tune of 20 to 30 per cent of the cost of the ship. the driving force behind this categorisation is the strongly-held belief that the retention of local skills and capabilities, particularly for the construction of warships, is essential for pursuing national objectives. While these state subsidies facilitated countries like China, south Korea, Japan and taiwan in developing highly automated and competitive shipyards, their withdrawal caused an equivalent slump in the western shipbuilding industry, saddled as it was with high material and labour costs. Most governments have traditionally been taking more than a passing interest in the shipbuilding industry because it employs a significant number of workers, utilizes a wide range of technologies, generates considerable income and encourages a large number of associated support industries. Despite the ever-increasing trend of automation, ship building remains a relatively high-skilled enterprise, with activities ranging from designing, fabrication and welding to management and commercial, all of which contribute significantly to national industrial capability.

WARSHIP CONSTRUCTION Construction of warships is a much more complex affair. Apart from an intrinsic need for greater strength, greater power,

greater stability, water-tightness and gastightness, there is the obvious added need for the installation of sensors and weapon systems. Owing to the specialist nature of each item, a significant part of the work has to be entrusted to a network of second and third level suppliers and subcontractors, and hence for the overall coordination and supervision of the project, the nomination of a lead architect becomes inescapable. the existence of an efficient and effective supply chain is also critical to the success of the enterprise, though reliance on the modular concept of construction certainly makes life easier.

SHIP MAINTENANCE, REPAIRS AND CONVERSIONS ship maintenance, repairs and conversions provide a useful back-up earning option, particularly for those shipyards with insufficient shipbuilding orders. All ships in any case do need periodical maintenance to enable them to operate profitably and meet the minimum standards laid down by the iMO and classification societies. While warships follow their own stringent maintenance cycle, other vessels are required to undergo special surveys every five years in order to remain seaworthy. ship repair requirements, on the other hand, can be periodic in nature and may include rectifying machinery defects, hull corrosion, tanks cleaning, overhauls, alterations and repainting. routine or emergency repairs may require dry docking, though in most of the modern yards, even complex underwater work can often be undertaken alongside at berths. ship conversions likewise are a lucrative activity from the shipyard’s as well as the ship owner’s perspective, as the latter struggles against high new-build prices and long delivery times. Pakistani shipyards Karachi shipyard and engineering Works ltd, the sole shipyard in Pakistan, was set up in 1957 under partial funding from the German government. it is capable of building and repairing medium-size ships up to 18000 tonnes and multi-purpose cargo vessels up to 26000 tonnes. it is self-sufficient in terms of associated support facilities like fabrication, foundry, machining etc and has constructed around 440 ships, repaired 5000 vessels and fabricated over 2000 heavy engineering units so far. the two-decade period from the early seventies was a profitable one from KseWs perspective as it bagged orders for 19 support vessels from iran, a cargo vessel and two tugboats from Abu Dhabi, two tugboats from saudi Arabia and a cargo vessel plus two bulk carriers from China. From the mid-90s onwards, foreign export orders having dried up, KseW ltd was

primarily sustained by government subsidies and orders from the Pakistan navy. A missile craft Pns sHUJAAt was first constructed there, followed by an order for the fabrication of a sub-section of the third Agosta 90B submarine. three Fast Attack Craft (Missile) of German design were subsequently constructed under contract from a thai yard. two small KseW-built tankers-cum-utility ships have recently been inducted in the Pakistan naval Fleet. the order for the construction of the 4th F22P Chinese frigate has proved to be a boon for KseW as it has resulted in up-gradation of the yard and training of their personnel in China. KseW is now collaborating with China shipbuilding and Offshore international Corporation for the in-country construction of two 500 ton FAC(M) for the Pakistan navy. KseW has also been meeting orders for the fabrication of general items like flood light towers, dumping grate stokers, clinker cooler trolleys, fuel storage tanks, wind turbine towers, fire tube and water tube boilers, heat exchangers, gates for dams, barrages and headworks, conveyors, elevators, sugar mill machinery, cranes, steel structures, towers, caravans, overhead steel bridges, sewage treatment plants etc. A ship lift and transfer system being procured from a German firm is under installation, which can be expected to significantly enhance KseWs shipbuilding and ship repair capacity. time will tell if this results in significantly changing KseWs financial fortunes for the better.

GLOBAL PROSPECTS At the moment, shipbuilding is an expanding market. in 2009, orders were placed for 169 ships, while the very next year, the order book increased by more than three times to 525 ships. this however presents a deceptive picture as to the health of the shipyards. the fact is that among the total of 198 yards globally, orders were only placed to 50 yards in 2009. in 2010, likewise, opportunities for construction of the afore-mentioned 525 ships were only given to 75 of the yards. A yard thus has to be competitive, either in terms of production costs or in terms of technological sophistication. european yards have thus been forced to focus on niche markets like yachts, cruise ships, small container ships and specialised vessels such as ice breakers, chemical tankers, Offshore support vessels, research ships and warships. Us effort is currently being devoted towards the construction of warships and vessels being used for domestic purposes, where a lack of competition has resulted in inefficiencies and consequently higher contract prices. south Korea is primarily investing in high-end

and high-priced vessels such as lnG carriers and offshore facilities. China is also now a major player in the shipbuilding industry, particularly in bulk carrier and container vessel categories. As far as warship construction is concerned, those countries that have the wherewithal prefer to construct them in their own yards. the trend to invest in countries with cheap labour and land costs is also picking up as it makes strong economic sense, the strategy being to produce simpler vessels there at nominal rates. Yards in Philippines, thailand, vietnam, Malaysia and india are accordingly making their presence felt. indian shipbuilding, which was initially catering to it’s own need, became export-oriented in the late nineties and is currently thriving through huge foreign investments and joint ventures. indian state-owned shipyards are however comparatively stagnant, with orders being only placed either by the indian navy or by the shipping Corporation of india. indian shipyards have also forayed into the manufacture of rigs, which is relatively sophisticated in nature with comparatively higher profit margins.

PAKISTAN’S PROSPECTS Pakistan’s prospects can be gauged by first looking at KseWs example. this stateowned shipyard had been buoyed up for a considerable period of time through injection of generous government subsidies, but for the past few years has come out of the red through generous orders from the Pakistan navy. so prior to considering the establishment of new shipyards in Pakistan, it may be worthwhile to review as to why KseW should not be privatised first. this would lead to a significant technological upgradation, incorporation of a modern design department capable of meeting customised requirements and the formulation of an effective marketing strategy to attract buyers. the only reason such a move has been resisted thus far is because of the yard’s supposed strategic importance. this facet has been blown out of proportion as KseW can certainly not construct warships, or other simpler ships for that matter, through purely indigenous means. such constructions rely massively on foreign suppliers for almost all the equipment, weapons, sensors, machinery, electronics and even shipbuilding designs and materials. so the claim of having achieved self-sufficiency in warship construction appears meaningless when seen in this context. Having said that, there is no harm in inviting proposals for setting up of new shipyards at designated places along our coast. Alternately, the choice of specific spaces can be left to the discretion of

would-be investors. if sufficient interest is visible, it can be taken as a sign of the viability of the enterprise. the Govt of Pakistan should preferably insulate itself against possible risks owing to fluctuating market conditions by restricting its contribution to the land, utilities and infrastructure (buildings) only. the foreign investor chosen can thus be expected to try his best to make the endeavour a success, since he would be the major beneficiary in case of profits and major affectee in case of losses. it would however definitely be in the country’s interest too to ensure that the project is a success, since that would in itself attract further investment. From Pakistan’s point of view, it should be ensured that the foreign investor selected has the necessary technological and financial background for setting up and running a premier shipbuilding and repair yard. such an investment would also result in the creation of an highly-skilled local workforce possessing wide-ranging high-order skills like ship designing, management, welding and fabrication.

CONCLUSION those governments possessing ample resources can only afford to pump in generous subsidies to keep state-owned shipbuilding yards going. these subsidies concurrently make them dependant and relatively inefficient. resource-constrained countries like Pakistan can barely manage to inject enough to keep their head above water, without any meaningful upgrade in their capacity, infrastructure or technological prowess. it is a capital-intensive field where one has to constantly stay ahead of the competition in terms of production costs, quality, logistical planning, marketing skills and above all, in meeting deadlines. Once a shipbuilding enterprise takes off, the benefits are enormous. Joint ventures with investors possessing ample finances and experience can help revive the flagging fortunes of the Pakistani shipbuilding industry. Apart from land and basic infrastructure, Pakistan would need to offer various other incentives to entice the best bids, the least of which is good law and order situation and a conducive working environment. the country possesses two of the key drivers for investment, namely low production costs and good access to important markets, and needs to exploit these well, not only to encourage joint enterprises but also to turn them into commercially vibrant ones. The writer is the Director General at the National Centre for Maritime Policy and Research, Bahria University, Karachi.

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Monday, 21 November, 2011

We should take advantage of this moment of financial and economic crisis to strengthen our bilateral relations in the different sectors of our respective countries


Portugal Prime minister, Passos Coelho

ANGOLA'S EDUARDO DOS SANTOS OFFERS HELP TO PORTUGAL nGOlA is prepared to help its former colonial power Portugal cope with its financial crisis, the oil-rich nation's President Jose eduardo Dos santos said. After meeting visiting Portuguese Prime Minister Pedro Passos Coelho, he said solutions needed to be found. they should be "advantageous for both countries" and "in a spirit of solidarity and mutual help", he said. Analysts say Portugal's economy is expected to contract by 2.8% next year and Angola's to grow by 12%.


'TRUMP CARDS' the iMF has agreed to give Portugal a $107bn bailout on condition that it introduces a wide range of economic reforms - including privatisation. Analysts say Angola could buy stakes in some of the privatised companies. An-

gola's investments in Portugal have risen sharply in recent years. the figure in 2009 stood at $156m (£99m), compared to $2.1m in 2002, according to the Portuguese institute of international relations and security (iPris), a lisbon-based think-tank. Angolan companies own the equivalent of 3.8% of companies listed on Portugal's stock exchange, from banks to telecoms and energy, it says. "We're aware of the difficulties the Portuguese people have faced recently and in such difficult times we must use our trump cards," Angola's state news agency Angop quoted Mr Dos santos as saying. He did not elaborate during the joint press conference with the Portuguese prime minister in the capital, luanda, what these trump cards were. Portuguese companies expected to be privatised include national airline tAP, utilities company energias

de Portugal and national grid operator redes energeticas nacionais. "We should take advantage of this moment of financial and economic crisis to strengthen our bilateral relations in the different sectors of our respective countries," Mr Passos Coelho is quoted by the AFP news agency as saying. Former BBC Angola correspondent louise redvers say Mr Passos Coelho's visit has highlighted the reversal of former colonial roles, with cashstrapped Portugal considering selling shares in state-owned companies to Angola. the family of Mr Dos santos - who has been in power for 32 years - controls a large chunk of Angola's economy, while most Angolans live in poverty. Mr Dos santos' daughter isabel is known to have a large Portuguese portfolio, as does the state oil firm sonangol, our former correspondent says. BBC NeWS



Here were a lot of things that were supposed to save europe from potential financial Armageddon. Chief among them is the eFsF, or european Financial stability Facility. in the spring of 2010, european finance ministers announced the facility’s formation with great fanfare. in its inaugural report, standard & Poor’s described the eFsF as the “cornerstone of the eU’s strategy to restore financial stability to the euro zone sovereign debt market.” the facility itself said in an October 2011 date presentation that its mission is to “safeguard financial stability in europe.” that of course hasn’t happened. And the evidence suggests that the eFsF may have only exacerbated the problems. in theory, the facility is supposed to provide a way for a country that the market perceives as weak to still borrow money on good terms. the initial idea was that instead of the financially troubled country itself trying to sell its debt to live another day, the eFsF would be the one to raise the money and lend it to the country in question. the logic was simple: country X might be shaky, but the eFsF deserved a triple-A rating. For all of its would-be financial firepower, the eFsF isn’t much to see—it’s just an office in luxembourg with a German-born economist CeO named Klaus regling, who oversees a staff of about 20. its power—and that rating—is derived from the assumption that any debt it issues is guaranteed by the members of the euro zone. initially, each member pledged unconditionally to repay up to 120% of its share of any debt the eFsF issued. (A country’s share is determined by the amount of capital it has in the european Central Bank.)

On paper, it all sounded great. the reality is that the eFsF wasn’t meant to be an active institution; it was supposed to be a fire extinguisher behind glass: never to be used. “the eFsF has been designed to bolster investor confidence and thus contain financing costs for euro zone member states,” wrote standard & Poors in its initial report granting the triple A rating. “ if its establishment achieves this aim, we would not expect eFsF to issue a bond itself.” Moody’s, for its part, wrote that the eFsF “reflects the political commitment of the euro zone member states to the preservation of the euro and the european Monetary Union.” that show of commitment alone was supposed to be enough to reassure the market. in granting the eFsF the allimportant triple-A rating, the rating agencies were somewhat cautious. they weren’t willing to assume, as they did with subprime mortgages, that any subset of debt guarantees—no matter how small—made by countries that weren’t themselves triple-A rated would be worthy of the gold-plated standard. instead, they insisted that the eFsF’s loans had to be covered by guarantees from triple-A rated countries and cash reserves that the eFsF would deduct from any money it raised before it passed those proceeds on to the borrowing country. Based on that, euro zone members initially pledged a total of 440 billion euros ($650 billion) in guarantees. However, s&P said in its initial report that the eFsF would be able to raise less than $350 billion of triple-A rated proceeds. Of course the euro zone did break the glass: the fire extinguisher was used, first in support of ireland, and then Portugal, and then Greece. this summer, the european Powers that Be agreed to bolster the eFsF’s lending capacity by increasing the maximum guarantee commitments of the member states to 165%, instead of 120%. that was supposed

to enable the eFsF to borrow up to 452 billion euros “without putting downward pressure on its ratings,” according to s&P. As we now know, that’s not nearly enough money to end the crisis, especially given that the eFsF’s commitments to ireland, Greece and Portugal leave the facility with a lending capacity of just 266 billion euros, according to a recent report from Moody’s. (i found it difficult to add up where the money went.) Hence the politicians’ latest idea: leverage the eFsF’s remaining ability to borrow. either have the eFsF offer first-loss insurance when a country issues debt, or turn its remaining capacity into the first-loss tranche of a collateralized debt obligation, which would raise money by selling bonds to other countries like China. Besides being undersized for the job, there’s a core structural problem with the eFsF: it is only as strong as its triple-A members—not just Germany, which according to that October 2011 eFsF presentation contributes 29% of the total value of the eFsF’s guarantees, but also France, which contributes 22%, and the netherlands, which contributes 6%. some financial analysts have questioned why any european country deserves a triple-A rating, seeing as eU members can’t print their own currency to pay off their debts. As the financial turmoil has unfolded, it’s become clear that the only eU country the market views as a bona-fide triple-A is Germany. so as much of europe crumbles, the eFsF’s tripleA, in the eyes of the market, is supported by a lone country. As one bond market participant says, “eventually, only the German guarantee will matter, and it isn’t big enough to cover this.” indeed, Germany represents less than a quarter of the eU’s GDP, and obviously the nation’s economic health is to no small degree dependent on other members of the eU buying German goods. (such interconnectedness was the whole point of the european

CORPORATE CORNER Farzana raja appreciates Benazir Income Support Programme

islaMabad: Federal Minister and Chairperson, Benazir income support Programme (BisP), Madam Farzana raja said that the present democratic government is serving the poor across Pakistan including, Azad Jammu and Kashmir (AJK) and Gilgit-Baltistan indiscriminately through the platform of BisP. she said that this is an unprecedented programme in the social sector of the country which is envisaged to uplift the living standard of deprived strata of the country besides poverty alleviation. pReSS ReLeASe

Three day workshop on ‘The Power of Entrepreneurship ‘

The euro zone’s self-inflicted killer OPINION


Union—and that helps explain why the cost to insure against a German default has more than doubled since the summer, to $93,655 a year to insure $10 million of 5-year German debt.) not surprisingly, the eFsF’s last 3 billion euro bond sale, on Monday, november 7, met with what Moody’s called “significantly less demand” than a similar issue last spring. the issue was originally supposed to be 5 billion euros, and the spread, relative to German debt, that was required to lure investors was over three times the spread that was needed last spring. As Moody’s wrote in its report, “the demand for the eFsF bond issuance was dampened by a lack of confidence over the credit resilience of its guarantors.” Another way to think about this is that since the strength of the eFsF is dependent on the strength of its parts, the more individual countries have to pay to raise money, the more the eFsF itself has to pay. in fact, it’s the definition of a vicious cycle. the eFsF’s funding costs rise along with those of its guarantors, and perversely, bond market participants say that the very existence of the facility also causes its guarantors’ cost to rise. that’s because there aren’t many investors who are interested in buying european sovereign debt these days. those who are demand a very high premium if they’re going to buy, say, italian debt instead of eFsF debt. this is why the eFsF was going to be hurtful, rather than helpful, if it had to be used: it competes with its very creators for investment, driving spreads higher and higher. One hedge fund manager calls the eFsF a “self-inflicted killer” of europe’s bond markets.” the eFsF is due to expire, and is supposed to be replaced by the european stability Mechanism, or esM, in mid-2013. But the esM looks like it’s going to have same problem the eFsF does: its finances depend on the very same countries that it is supposed to bail out. in other parts of the world, this isn’t called stability; this is called a Ponzi scheme.

KaracHi: A 3-day hands-on workshop on ‘the Power of entrepreneurship’ was held at islamic Chambers of Commerce and industries from 15-17 november, 2011. it was organised by Publicitas training and Development with support from state life Corporation, First Women Bank limited, Askari Bank limited and the Bank of Khyber. the workshop was inaugurated by the Guest of Honour, Ms shafqat sultana – President, First Women Bank limited, the Chief Guest, Mr shahid Aziz siddiqui – Chairman, state life Corporation, Mr Ozair Hanafi – executive Chairman, Publicitias training and Development and Mr syed shahjahan salahuddin – President and CeO, Publicitas Pvt ltd. pReSS ReLeASe

Cathay Pacific releases combined traffic figures for October 2011 KaracHi: Cathay Pacific Airways today released combined Cathay Pacific and Dragonair traffic figures for October 2011 that show a rise in passenger numbers well below the increase in capacity. Cargo and mail tonnage once again showed a year-on-year decline. General Manager, Cathay Pacific revenue Management, James tong said, "Our passenger traffic held up quite well in October, but the growth could not keep pace with the increase in capacity, which accounts for the drop in load factor. pReSS ReLeASe

ras Al Khaimah Free Trade Zone to organise road show in Karachi KaracHi: ras Al Khaimah Free trade Zone (rAK FtZ) is organising a two-day road show in Karachi to attract Pakistani businessmen, entrepreneurs and investors to benefit from the business opportunities available at rAK FtZ and expand their business in the region. the road show will be held on 23rd and 24th november at Pearl Continental Hotel, in which potential investors will be briefed about investment options at rAK FtZ through which Pakistani entrepreneurs targeting emerging markets can set up offices in UAe. pReSS ReLeASe

SDPD lauds national Assembly for passing the Prevention of Anti – Women Practices Bill 2011 islaMabad: sDPD, a parliamentary development programme of UnDP welcomed and appreciated the passing of Prevention of Anti – Women Practices (Criminal law Amendment) Bill 2011. the bill has termed a landmark achievement for women empowerment and covers anti-women practices like forced marriages, wani, badla –esulh or using women for settling disputes and recommends punishments for these crimes. the bill also ensures that women are not denied their share in inherited property. pReSS ReLeASe

KARACHI: Mr Shahid Kamal, pakistan Ambassador to Germany, Dr tilo Klinner, Consul General of federal Republic of Germany and Mr Qazi Sajid M.D, BASf pakistan and others. PRESS RELEASE

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Monday, 21 November, 2011


Entire country would be unplugged if the facility of free power supply to WAPDA officers and workers is suspended


naveed Qamar

Ambiguity on the political front keeps investors at bay

weekly review g



Bears return to KSE with 30 point dip 88 scrips advance, 142 decline and 99 remain unchanged out of total 329 scrips Absence of buyers on intervals invites a colour of panic




Index ends flat, as speculative activity rescues bourse 103 scrips advance, 134 decline, and 113 remain unchanged out of total 350 scrips low volumes tempt short sellers









StAff RepoRt

nvestOrs at the local bourse remained nervous throughout the week as political uncertainty rose sharply following the offer of resignation by Hussain Haqqani (from his post as ambassador to the Us) and departure of PPP’s (ruling party) old stalwart shah Mahmood Qureshi. Dismal volumes verify the lackluster activity of the market, as they dipped

by 6 per cent Week on Week to 41.5 million shares, while Kse-100 index closed at 11,938 points, shedding 101 points (down 0.8 per cent WoW). Foreigners too were cautious, selling shares worth $1.3 million. Macros: the flow of remittances from overseas Pakistanis continued as they stood at $4.3 billion in 4MFY12, surging by 23.2 per cent YoY. in October 2011 alone, remittances were up by 19.0 per cent YoY to $1.1 billion. Foreign investment on the other hand, plunged by 58.4



Traded volumes nosedive to record 28m shares at KSE 57 scrips gain, 146 lose, and 113 remain unchanged out of total 316 scrips market capitalisation remains down and decreases


OlitiCAl strains came to the forefront again as the Kse-100 index lost 101 points (-0.83 per cent WoW). Devoid of investor activity, volumes continued to be low since trading resumed after eid holidays, with average daily volume coming at 41.5 million shares (-6.0 per cent WoW). the lackluster environment was duly reflected in scarce portfolio investment flowing into or out of the exchange. Of these, foreigners and mutual funds were most cautious, selling shares worth $ 1.3 million and $2.3 million respectively. the political situation has seen gradual deterioration since the start of november. With reshuffling in the political hierarchies and resignations of important political personal taking fold, investment climate remained dry as investors preferred to remain watchful. Moreover, technical level talks with the iMF – circling around independent external sector assessments – concluded with Pakistani officials revising their international trade projections downwards. Although this is not expected to have a material effect on macros, the data released on foreign investment in the country was dismal; FDi stood at $340.2 million, down 27.7 per cent YoY.



Bulls led by OGDC return to KSE 150 scrips advance, 132 decline and 17 remain unchanged out of total 299 scrips BAFl, Fatima fertiliser lead volume by combining for than that 50pc of turnover

90 scrips advance, 134 decline, and 116 remain unchanged out of total 340 scrips Advancement in bellwether oil and gas exploration keep overall index afloat.

per cent YoY in 4MFY12 to $238.1 million with foreign direct investment at $340.2 million, down 27.7 per cent YoY. Foreign portfolio investment witnessed an outflow of $102.1 million 4MFY12 compared to an inflow of $101.3 million in the corresponding period last year. npl rose at an accelerating pace: According to data released by sBP this week, non performing loans (nPl) rose by rs38.3 billion in 3Q2011 to rs613, a much higher pace compared to the previous two quarters. nPl’s for public

sector banks and private sector banks jumped by a respective rs26.3 billion and rs8.8 billion. individual stocK perforMance: new discoveries and high oil prices created interest in the exploration and Production sector with POl and OGDC outperforming the market by 2 per cent and 1.2 per cent, respectively. Among the fertiliser stocks, FFC underperformed the market by 6.1 per cent as investors feared reversal in fertiliser prices on news of restoration of gas to the fertiliser sector.



the week started on a negative note for banking companies. According to data released by sBP, non-performing loans rose by PKr 38bln in 3Q2011 – a jump of 6.6 per cent QoQ. this came at a time when the pace of nPl accretion was thought to be slowing down and was accordingly taken as a strict downside by investors, as accordingly reflected in the banking sector reporting negative 3.1 per cent WoW performance. However, this rise in nPls was not proportionate through all, as public sector banks saw the highest deterioration in asset quality. A beneficiary however, was BAFl, who has reported improving asset quality and upon close inspection was the only bank to have recorded a decline in provisioning for the 3Q2011. in other sectors, FFC saw a considerable decline as investors raised concerns over reversing urea prices now that gas has been restored.

in the coming week, what will be interesting to see is the performance of fertilizer stocks given that they have dominated the volumes in the incumbent week. this is with particular reference to how investors perceive possible urea price drops in the wake of resumed gas supply. in this regard, there is a slight possibility of enGrO benefiting at the expense of FFC and FAtiMA. Another highlight sector is cement and textiles which are expected to be sensitive to external trade news. this all is though assuming a less volatile political scenario as the past week has been anything other than that. Unless calmness on the front is achieved, investors are likely to stay low, resulting in depressed volumes and scarce trading activity during sessions. Again the trend of foreign investors would be essential in this regard, although a reversal in selling sentiments remain unlikely. support, if any, would be emanating from local investors on the basis of company activity.

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If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen

Monday, 21 November, 2011



Angela merkel, German Chancelor


Adieu mr Euro?



jOn nADLeR

OlD staged an attempted recovery Friday following thursday’s washout in prices that brought it to within striking distance of the pivotal $1,700 level. As things stood early this morning, the yellow metal was on course to record its largest weekly decline in circa two months’ time. ironically, the vast majority of participants in various weekly price surveys were bullish on bullion’s prospects for this week last Friday. However, last weeks near total eurozone meltdown and erosion in the common currency derailed the bullish track for precious metals and ended up bolstering the dollar instead. the greenback traded at a five-week high against an assorted basket of currencies mainly on the back of “lesser of all evils” perceptions and a continuing string of fairly positive Us economic statistics coming into the news pipelines. in fact, based on the that the Us economy is growing at the fastest pace of the current year and also at the best such pace in a year-and-a-half, it is not all that surprising that anxiety-ridden money is finding its way into America (via the dollar) at this juncture. What and where are the alternatives? spot dealings in new York opened on a mildly higher note this morning but players remained wary of pre-weekend book-squaring effects and of further negative news emanating from europe. some feel that the sell-offs might not be complete and that any further damage in the equity markets might bring about margin call situations which might prompt additional mobilisation of precious metals positions. For the time being, the maintenance of the $1,700 mark is critical for gold, as is the $30-31 zone for silver. the white metal fell hard on thursday and overnight lows were recorded just under $31 per ounce. the persistent fear in the gold and silver markets remains the possible drying up of money markets in europe in a liquidity squeeze. little question remains as to the fact that metals would suffer under such a dire scenario (among other assets). Gold opened with a gain of $9.60 per ounce but soon traded back down in negative territory and under the $1,720 level, while silver initially added 37 cents on the open and later traded under the $32 level per ounce again. traders we polled in new York this morning indicated that the day could still end in the “red” but that it all depends on euro-flavored news at this juncture. the ishares silver trust (slv) declined almost 7% yesterday and by this morning the sGe hiked silver margin requirements up to 18% of a contract’s value. the white metal has been on a nausea-inducing up/down/up/down path ever since it touched the $50 mark in late April and then fell into a bear market. it is assumed that the new margin parameters will come into effect today. there is still a chance of further such increases in required margins if today’s

action goes beyond daily trade limits. Analysts pointed out that silver’s extreme volatility (since late April) has made for a very skittish shanghai Gold exchange – one that sees the price roller-coaster continuing, and one that aims to prevent devastating losses among small traders. thus, the fresh record in silver contract margin amounts. enough said. Platinum advanced $10 to start the final trading session of the week at $1,591.00 while palladium was unable to join the group and went the other way with a decline of $1 per ounce and a quote on the bid-side at $607 at the opening bell. Copper and crude also made attempts at damage repair with gains of 1.6% and 0.9% respectively. the Us dollar paused and slipped to under the 78 level on the trade-weighted index while the euro made efforts to get back closer to the $1.36 mark against it. One fund manager whose view is not exactly bullish on gold is using the indicators currently flashing in the bond markets to make his case. Michael Gayed, chief investment strategist at Pension Partners llC, notes that normally investors load up on gold in anticipation of severe inflation and when real interest rates are or are trending negative. However, writes Mr. Gayed, “if the bond market is [currently] right, then we may be entering into a period where we are no longer in a negative real rate environment. if we are headed into deflation, that means the any interest rate which is above 0% results in a positive real rate environment (due to negative inflation). this is not an environment historically gold can do well. that means that despite arguments that gold continues to outperform treasury paper, it could very well be that the pendulum swings to treasuries outperforming gold.” Mr. Gayed uses the ratio of the ieF (the t-bond etF) versus the GlD to measure such pendulum swings in the cycle. right now, and as of mid-August, the ratio of the two etFs appears to not only have bottomed but it also shows the “early stages of an uptrend.” Mr. Gayed notes that “this would occur under a scenario of long-term deflationary expectations taking hold in the psyche of investors. it looks like we may be entering a period where paper beats rock.” no mention of scissors needed. Over in europe disaccord between France and Germany regarding the role that the eCB ought to play in the unfolding debt drama remained frontpage news material this morning. the measures that were agreed upon at the late October summit by european leaders have yet to be implemented and the markets continue to await the materialization of austerity programs in italy and in Greece. Meanwhile, bond yield of various euro-zone countries continue to be rising and the 7% figure keeps coming up as the one beyond which danger/default/rescue paradigms could be lurking. Only Germany and the netherlands appear currently immune to the effects of the crisis as regards bond yields. While the Franco-German debate about how to


keep the euro zone afloat rages on, there are signs that certain parties are still willing to help. Having come to what World Bank President Zoellick describes as the “tipping point,” the european Union really needs to get its members to come to an accord and produce a concrete plan to stop the crisis in its tracks. China, Australia, Canada, and the UsA, are all apparently ready to support the region via the auspices of the iMF if in fact an agreement is arrived at by the union’s policy makers. Obviously, all of the countries on that list have vested interests in europe and would potentially suffer collateral damage if the situation were to be allowed to disintegrate into a chaotic free-for-all. For now, the latest proposal (and one that appears to be gaining traction) is to have the eCB lend money to the iMF which in turn would use such funds to bail out one or another de facto insolvent eurozone nation. it is widely assumed that Germany and the eCB itself might be against such an idea but it is also widely accepted that the eU has of ideas, solutions, and the amount of road still ahead of it before a do or die decision has to be made. this morning’s market chatter was once again pointing to a modicum of bond-buying by the eCB as having taken place. the “Big Plan.” Will it be this weekend? Will it be next? Only “the shadow” knows… no week would be complete if we did not mention that all-important (for commodity players) country: China. there, we just did. the country’s regulators are (once again) warning that funds for certain locally-backed property development projects may soon run out. the CBrC urged lenders last week to clean up their act and step up asset sales and debt restructuring while it urged banks to curtail (make that: cut) lending to “high-risk” projects. the ratchet-tightening by Chinese officials comes amid an unmistakable slump in property prices. Chinese housing prices fell in nearly 50% of governmentmonitored cities last month. now there’s a switch from what appeared to be an endless upward spiral. Analyst opine that the “turning point” in Chinese property values is upon us (possibly along with the turning point in the country’s economy). We close today with words of wisdom from neighboring Hong Kong: “the government should start to be cautious about property prices over correcting on the downside as it will inevitably affect the economy,” Wee liat lee, a Hong Kong-based property analyst at samsung securities Co., said in an e-mail. [to Bloomberg news]. When residential property accounts for 6.1% of a country’s GDP and when such a pivot point threatens to potentially wreak havoc on that sector, commodity bulls are well-advised to remain vigilant. Pendulums are made to swing. Heads (and wallets) are at risk when such objects swing above.

He more things change, the more they stay the same, at least in the eMU horror story as governments tumble, contagion and bank-run fears cross the atlantic, and investor greed gives way to fear on anything remotely linked to the fate of the single currency. spain’s socialist government’s fall today (most likely), will make for the fourth change of guard within the eurozone’s most suffering economies. And while Portugal and spain at least granted ballot-box exits to their leftists, Greece and italy have had technocrats installed by financial institutions themselves run by political appointees, bolstering the charge that the monetary crisis has not only assumed a distinctly political outlook, it has also begun compromising the union’s democracy. For the wicked, tactical euro-longs each time banker boys (lucas & Monti) reassure patrons with austerity talk are sure short-term winners. But for the more sensible, strategic prudence should still dictate selling on the euro upside, as opposed to buying the downside. Despite the brief risk-return towards last week’s end, it does not surprise me that the euro has dropped three consecutive weeks against the dollar, down six per cent to 1.3525. Also, with the esFs support system proving increasingly unviable, watch for eventual market rejection of the austerity argument to blow yet another hole in the Merkel-serkozy desperation to safeguard big banks, even at the cost of a long and deep recession. the euro can sink to 1.30 a lot sooner than the six-month window my crystal ball gave it a couple of months ago. the decision to remove Papandreou and Berlusconi, especially after they pushed through austerity measures their successors would enforce, makes me think i’m living in a surreal, dream world. Why ditch them just when they fell in line? And why make cabinet approval for fiscal cuts a precondition for resignation? How does it make sense that they must leave for doing what they were told? How will rome and Athens now posture in the drama, other then squeezing the middle and lower income groups? Who decides who presides over defaulting governments? if austerity is the main theme, why don’t Merkel, sarkozy, Draghi and Co explain how hardcore austerity won’t further stagnate economies and increase deficits? When public austerity is not accompanied by rapid devaluation, downtrends are only exacerbated. surprise surprise, the single currency does not allow such a contingency. And with italian, spanish and even French yields climbing to unprecedented levels despite large eCB purchases of peripheral debt, coupled with bank losses compromising French liquidity, there is little life left in the euro. that policy makers still publicly support the euro narrative betrays something devious at play in europe’s nerve centres. something that cannot, must not be allowed to reach the market. At least not now. My gut tells me that protecting europe’s banks instead of its people, forcing puppet bankers to lead governments, trumpeting austerity even as millions protest and thousands are arrested shows the troika has realised its days are numbered. And its heads would rather spend them making as much targeted gains as possible, instead of fretting over people’s fortunes as their return to power is practically ruled out. europe’s disappointment has started feeding into emerging market growth as well. Kiwi and rand are down 3.7 and 3.2 per cent respectively, Brazilian and indian indices are down, their industrial production weakening. Korea’s industry has barely breathed all year. since they are export-dependant, further slowdown in the economic north will continue to compromise growth in higheryielding emerging economies that were once the cornerstone of integrated, international bottoming out. risk hopping onto commodity currencies only when brief windows of risk present themselves. Cable is just as uncertain, being pulled by divergent forces as weak growth and hints of more Qe dent sterling’s safe-haven appeal. For any sanity to return to currency markets, the euro debate must reach a conclusion. either the troika’s been holding aces very close to the chest, or the single currency’s death rattle is just around the corner. there will be no middle way. My bet? Adieu Mr euro!

A version of this article was first published on resource investor

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profit 21th November, 2011  
profit 21th November, 2011