Pakistan’s Silent Revolution
Abdul Hafeez Shaikh, Pakistan’s minister for privatization, believes his government has effectively turned the tables on the sceptics. “We have brought about a silent revolution on the stock market,” he told Asiamoney in an interview. “We have brought so many new investors to the stock market and put money in the pockets of many people. It’s all very unprecedented.”
According to Shaikh, up to 400,000 new equity investors on the Karachi Stock Exchange (KSE) have picked up shares in four government-owned companies that have listed in the past 12 months, namely Oil and Gas Development Corporation (OGDC), Pakistan Petroleum Ltd, Sui Southern Gas and Pakistan International Airlines.
This has raised the number of Pakistan’s equity investors to almost half a million from below 100,000 in 2003 and reinforced Shaikh’s view that “the stock market is now open to a lot more Pakistanis than ever before”. The government estimates the new stock sold for a combined PRs20 billion (U$342 million) and its total market value by early September had reached almost PRs32 billion, a gain of 60 per cent.
Based on the record of the past year, many analysts argue that Pakistan’s new Prime Minister Shaukat Aziz may be keen to step up the process of bringing IPOs to market in the coming months. They believe the government’s remaining stake in the now privatized United Bank Ltd, as well as government-owned shares in State Life Insurance Company and Kot Addu Power Company, may be on the offering list by the end of this year or early in 2005.
“Many investors feel the IPOs brought to the market by the government are often successful and this is giving momentum to the whole process,” Shaikh says. He notes that the Pakistan Petroleum offering was significantly oversubscribed, mirroring the large public interest in last year’s OGDC listing.
Analysts believe there is still a great deal of prospective investment floating around Pakistan, which could be destined for the stock market. This is largely the result of a significant turnaround in Pakistan’s balance of payment position after the New York terrorist attacks prompted the government of General Pervez Musharraf, the country’s military ruler, to join the US-led war on terror. Consequently, the lingering fear in the 1990s that Pakistan would go through its first-ever default on its foreign debt repayments is now confined to history.
Since 9/11, economic assistance from the United States and other western countries has come by way of support for Pakistan’s plea to have its debts forgiven, with new debt offered on concessional terms. The war on terror has also had another important economic benefit for Pakistan. Annual remittances from overseas residents have escalated sharply, with those sending funds now preferring to use regular banks rather than the traditional hawala or hundee systems where money is delivered via underground channels. Increased scrutiny by central banks in different countries, with the objective of probing for terrorist funds, has prompted the change.
“We are continuing to receive high levels of remittances, some of which are finding their way to the stock market,” says Salman Shah, former chairman of Pakistan’s national privatization commission. He says Aziz’s biggest challenge now is “to demonstrate that these large inflows of funds can be turned into investments in long-term projects and offers for privatization of the public-sector companies on offer.”
Shaikh notes that successful bank privatizations have added strong impetus to privatization plans in other areas, such as for state-owned Pakistan Telecommunications Corporation Ltd (PTCL) and National Investment Trust (NIT), the largest mutual fund owned by the government. Last year Pakistan privatized United Bank and Habib Bank. The government now only controls National Bank of Pakistan, a large public-sector bank that is used for government transactions.
Among companies likely to be offered for privatization in the next three to six months, analysts say the government has been quietly examining the interest expressed by Singapore Telecom for PTCL. This would involve acquiring 26 per cent of PTCL’s stock and taking management control. There has been no official announcement about SingTel’s offer, although one telecom consultant hired by the government to review the case says: “Singapore Telecom could take over PTCL if this deal works out.”
Similarly, NIT’s management is said to have made preliminary plans to break up the trust into five segments. Each will be offered separately so that its privatization is not delayed if a single buyer cannot be found. “If Shaukat Aziz can get market for Pakistani exports through fresh negotiations with large and developed economies and the upcoming privatization offers receive attention, this country’s destiny could begin to change,” Shah says.
Nasir Bukhari, another prominent commentator and head of the Karachi-based Khadim Ali Shah Bukhari group, says there is a lot of interest from prospective investors “especially with new hopes raised after the election of Shaukat Aziz as the prime minister”. Bukhari’s group has significant stakes in banking, information technology and the stock market.
Aziz was finance minister for five years, after returning to Pakistan in 1999 to work with General Pervez Musharraf’s military government, following a successful career in international banking. “People in the business community expect Shaukat Aziz to be far more responsive to the needs of businessmen. He is a known commodity,” says Bukhari. Many businessmen expect Aziz to rapidly work towards putting together a new package of economic reforms and fresh incentives that would give strong impetus to new investments.
But sceptics warn that Aziz’s hands are tied when it comes to the many challenges Pakistan faces, most notably potentially adverse internal security conditions that mean prospective western businessmen are fearful of making long-term business commitments. In Karachi, the southern port city and business capital, businessmen warn that security fears are among the top deterrents for investors looking at establishing new projects. Mohammad Suhail, senior equity analyst at Karachi’s Investcap securities brokerage house, agrees: “The security conditions are an important factor for many businessmen,” he says.
As a result, a simultaneous surge in direct investment from foreign and domestic players is unlikely, even though the Karachi stock market has risen 200% since September 2001 and continues to rise.
Suhail says equity investors remain unaffected because they see many positive trends. “For people coming to the stock market, the view is positive. Primarily, these investors see the market having risen so much that nobody is predicting a sustained downturn any time soon,” he adds.
Low interest rates – at 7-9% compared with around 18% three years ago – are another supportive factor, as is the relative stability of the Pakistani rupee, which has been largely steady for three years barring a recent marginal decline against the US dollar.
In the heart of Karachi’s business district, small-time stock dealers gather near the stock exchange to watch the screens for the latest company results as they prepare their daily stock lists. One young dealer Inaam Khalid notes that the interest is spread across all sectors. “People want to just invest because there’s a trend which has been set here,” he says. “The fast rise of the KSE has created lots of good success stories.”
Despite the optimism, Bukhari warns that Aziz needs to move fast to begin delivering on expectations that he will oversee a wave of new reforms that will benefit businessmen. Many are optimistic that Aziz, who was handpicked by General Musharraf, will not suffer from the friction that existed between Musharraf and former prime minister Mir Zafarullah Khan Jamali, who resigned in June after months of wrangling. “Shaukat Aziz’s election has been a source of inspiration for many businessmen. But if he is not able to deliver, there will be many disappointments too,” adds Bukhari.