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Why I would propose Dr Ishrat Hussian as Caretaker PM ?

by Asad Rizvi
@asadcmka

Pakistan will soon be heading for General Elections, there are quite a few names circulating for Caretaker Prime Minister. As 5-year term of present government ends on May 31, the interim Prime Minister and the Leader of Opposition are yet to announce the name.
Simultaneously, with the discontinuation of current parliament, a caretaker government will be appointed to make sure that the country is not without an executive.
The responsibility of caretaker government is to facilitate the normal process of formation of new government by supporting the system until the next government is elected.
As per the constitution, caretaker government that lacks democratic legitimacy because it does have parliamentary support has 90-days time limit for formation of newly elected. But we have a poor history of severe period violation.
Though Globally, constitutional reading, or history of legislation would suggest that norms differs from country to county, as there is no single definition. In few countries such as Nederland’s, Ireland, New Zealand, Portugal, Spain or Australia rules are flexible that may vary depending on circumstances.
The caretaker government is expected to behave with restrain and ensure the will of the electorate that the elections are “Free and Fair”. They are not expected to take important decision, neither are expected take new policy initiatives, though they can make temporary arrangements to fill the gaps.

Why and Who is the Best Choice for Pakistan?

Though after dissolution of parliament the task of Caretaker government is to ensure smooth and fair elections and to assist in helping in formulating a new government, but the matter is not as simple in Pakistan.
Technically, time period for the caretaker government is 90 days that can be stretched for couple more months or even beyond like it happened in past, which is debatable, but the timing are critical for the nation, which is loaded with day to day “Cash Flow” problems.
In Pakistan’s case, the situation is so alarming that Managing of Cash Flow is not the job of a team of few financial experts or a Caretaker Finance Ministers task due to worsening of  maturity profile caused by extensive  borrowings, low revenue collection, wide trade gap due to pathetic exports and unrealistic imports. Remittance is the only glimmer of hope that has almost exhausted.
Therefore, it is extremely important to appoint a Caretaker Prime Minister that has basic sense of urgency to manage financial mismanagement, or else a complacent approach to managing of cash flows will put country in stiff financial condition for the newly elected government that may take another 6-12 months to settle down.
In its budget presentation, for the Current Fiscal Year ending June 2018 government estimated payments is USD 3 Billion. They have so far received commercial loan of USD One Billion and another amount USD 1.5-2 Billion commercial loan should be in pipeline, as no other source of funding will be available due to expiry of its 5-year term.
Since duration of current commercial lending ( $ 3 Billion) is of short term period, what is more worrisome is that for FY 2018-19 by adding this borrowed amount to next FY borrowings, which is estimated around USD 8-9 Billion, Pakistan will have to borrow or arrange a total amount of nearly USD 11 Billion by end of June 2019, through commercial transaction and Eurobonds and Sukuk.
There is a huge risks that unless balance of payment position improves, which is not in sight due to rising oil prices, further worsening of BOP could add to gloom. This is why overall economic conditions demand an experienced and Professional Caretaker PM that have extensive understanding of international financial market. He should also have sufficient knowledge of financial products and instruments.
This is why my vote is for Dr Ishrat Hussain for Caretaker PM post at this crucial hour because he is the perfect man for the job. Having joined Civil Service in the mid 60’s, he is an administrator too. By profession he is globally known as a Banker, Economist and Educationist.  He has served World Bank for nearly 20 long years.
Until December 2006, he has served as the Governor State Bank of Pakistan and it was during this period Pakistan’s ailing economy got the much needed kick start due to SBP’s Expansionary Monetary Policy that helped to increase aggregate demand that helped in boosting economic activity. Discount Rate was cut to almost half from the highs of 13 pct. During his tenure, Rupee remained stable and in 7 year period it eased from Rs 52 per USD to Rs 60 per USD. From 2000-2006 GDP averaged to around 5.7 pct, (averaged 4.3 pct from 2000-2003 to and around 7.1 pct from 2004-2006). Public Debt was reduced by more than half to 45 pct from nearly 100 pct, which has again breached FRDL limit. It can be argued that Debt is MOF’s baby, but it’s the monetary policy, which play major role in stimulating the economy that ultimately generates income. The economy during his period boomed because Bank lending to Private Sector averaged around 75 pct, which is currently 55 pct.
Therefore, based on above facts and keeping in view the brittle economic condition of Pakistan, Dr Ishrat Husaain is the best choice as a Caretaker PM.

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Pakistan Budget Analysis

by Asad Rizvi
@asadcmka

PML (N) Government plans to unveil 6th Budget (18-19) in its 5-year term, as current fiscal year ends, exactly after 64 days. There is plenty of debate, as General Elections will be due in 90 days time after the expiry of term.
Mifta Ismail gave his own reasoning that why budget is not for 3 month period and why for full year, which he will be presenting today.
He has giving his own logic/argument, but the question is, when only few days are left, in such a situation is this normal practice or he should only give a modest stimulus and not a full year budget.

Why Now ?

The timing is ideal, overall the economic numbers are presentable, which best suits the government. Based on available data it is projecting 5.8 pct growth. The energy production is at highest levels in terms of megawatts (MW) as installed capacity could surpass 30.000 MW by the FY end, but supply increase to meet the demand will never be possible due to funding constrain, as nearly over USD 3 Billion extra funding is/will be required to make the payments.
CPEC related activity helped cement sector to blossom. Despite policy changes in Gulf States after oil crash, remittances have not suffered and inflation too dented SBP’s 6 pct target, which will comfortably end below 4.25 pct that puts question mark on its January’s policy rate hike because it has made government borrowing unnecessarily expensive.
By presenting the budget today, government will be able to paint a better picture of the economy due to data advantage, which is clearly supportive. Signs are obvious that it is likely to worsen after the completion of full 12-months period because of quite a few unfavorable factors. This is because the budget will be based on 7-8-months data due to time lag, which is mostly delayed by nearly 2-months depending on reporting period/zones.

Conclusion

The effort is certainly going to be towards heavier dose of populism and the focus could be to give boost to subsidies, but the price will be heavy due to funding constrains. While, there is lot of noise about salary hike and amnesty scheme that may provide tax relief to around 500.000 plus tax payers, which could help to gather few Urban area votes, this will roughly cost something around Rs 100 Billion.

Projected growth rate of 5.8 pct by FY end looks higher, because agriculture data is on the higher side, as cotton and wheat production is already off target. Whereas, there is a huge risk that in coming months agriculture data is most likely to worsen due to poor weather condition forecast that may end up with lower production, unless monsoon condition turns supportive. Though Sugar production may be sizable in volume, but prices in the international market have collapsed by nearly 25% due to glut.

While, celebrating higher growth we cannot ignore two factors that has helped growth in service sector and due to import led growth. If we talk of service sector growth then we should take into account Rs 4.1 Trillion Currency in Circulation, $ 5.6 Billion Derivatives and SBP’s Open Market Operation (OMO – Rs 1 Trillion), which is helping undocumented economy, but is choking Private Sector growth. Despite record 3 pct export refinance, which is a huge favor to exporters and is needed to be mentioned, devaluation or depreciation of currency makes little sense.

Business community needs genuine liquidity through banking sector for financing purpose. It cannot wait for ages in expectation that someday market will be blessed with FDI money and it will change the fate of our nation. It did not help in past decade during Musharaff era, neither it will help in future. Because there is no such thing as free lunch, it is mostly hot money as against sale of Pakistani institutions/stock market. Remitting annual profit is a pain in the neck is a good benchmark.

My biggest argument or query to the authorities is that during PML (N) it took loan of nearly USD 35-37 Billion and Oil saving during its tenor was/is of nearly USD 25 Billion. Minus Debt payment, where has all the money utilized/disappeared? Off course it was/is spilled all over, which is not result oriented.

SBP Exchange Reserves has plunged to USD 10.917 Billion from USD 18.142 Billion in FY 2015-16. Annual Debt Financing is of nearly Rs 1.5 Trillion is likely to easily surpass to higher level due Higher Policy Rate and Rising FED Rate factor. Are we ready for the record high oil bill in FY 2018-19 due to possibly higher oil prices and governments plan to generate more electricity? Then what about Circular Debt or we are happy by parking it in a separate head that has surpassed Rs 1 Trillion because it also helps to show lower fiscal deficit?

In a falling commodity price trend and thin growth in food production what is our export target that saw month jump of 24 pct due to duty drawback and GSP plus factor. I doubt if the higher export trend will continue until June.

However, my optimism is totally dependent on two factors that if the government is able to get good part of 120 million ID Card holders registered into the tax net and secondly by abolishing the FBR DC Rates & by implementing the tax that will be based on actual transaction amount.

Trust me both the decisions/implementation will ultimately lead towards documentation of economy that will help to turn the fate of Pakistani nation in positive territory in next 5-10 years.

With sensible and able leadership Pakistan will not have to depend on the external sources. The country can break the cycle of poverty, as it can create its own economic dynamism that should ultimately provide opportunity and give freedom, bring prosperity that should benefit every Pakistani citizen.

But let’s see who will bell the cat !

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction)

My Tv Talk show on Pakistan Economy

Topics 
 https://www.youtube.com/watch?v=i-rxuRuuW2g&t=169s
-Possibility of Bank Sale in Pakistan
 
-Inflation/Policy Rate
 
-Pak Rupee
 
-Budget/Amenesty

Another Interview on Economy dated March 23, 2018

Hat trick of Rs One Trillion T/bills Auction  

by Asad Rizvi
@asadcmka

 

After almost 4 and half years, liquidity management is a new challenge faced by Pakistan’s Banking Sector, unless SBP revert back to its 5-year old Open Market Operation (OMO) injection policy.

Unlike what it was after October 2014 and until last week for Banks Treasury, the situation has taken a complete u-turn, as during this period the size of market have sharply grown by two folds.

To give you some sense about the market, in October 2014, size of Commercial Banks Deposit was Rs 8.36 Trillion against Commercial Banks lending of Rs 4.3 Trillion suggesting fall in Deposit/Advance Ratio from the peak of 74-82 pct in 2005-7 to 50.9 pct in 2014 that has now inched up to 55 pct. In 2014, total investment by Banks in government securities (GOP) was Rs 4.148 trillion against Rs 7.397 Trillion (current).

Where is the catch ? All these years the economy suffered badly as banks refrained from lending to Private Sector at same proportion, which is why at one stage bank lending to private sector entered negative zone and our policy manager kept quite probably to meet IMF targets that helped reduction in spending and deficit.

Interestingly fiscal managers took credit of sharply reducing the deficit with the help of inflating Circular Debt number, which was/is not taken into account. I do not solely blame SBP for the Fiscal part of mismanagement, as it was assigned with a task of sizable Cash Management by the Fiscal managers. Unfortunately it was/is at the cost of real economic growth, which is Central Bank’s responsibility to help in creating new job opportunities, managing liquidity of financial system and effective use of its monetary tools.

After passing of 54-months or 4 ½ years, SBP is for sure once again in a driving seat and can effectively stimulate economic activity to a desired level by not diverting funds towards government paper. It has to realize that the country is in dire need of real economic growth at a much faster pace for a longer period of time to overcome challenges.

As of now bank investments in GOP are 61.5 pct, which is far more than lending to Private Sector (55%) that tells the true story of economic difficulties, and why there is shortfall in revenue collection and decline in exports. Rest is all story telling about economy.

Banks Investment Strategy

While Banks since almost last 6-months have been bidding in T/bills & Govt Bonds so aggressively and Policy Rate expectation too remained Bullish to such an extent that they did not even care about piling up of large amounts of holdings of GOP Securities that accumulated in shortest period (3-months). Presently the most worrisome factor for Bank’s Treasury is that in next 3-fortnightly T/bills auction the size of auction amount is more than Rs one Trillion in each auction.

Banks cannot afford to miss out any of its auction target because deploying of any excess amount of liquidity will be very costly affair. Firstly because banks cannot be not be sure about the SBP’s coming stance that it will hold regular mop ups or will keep market liquid with a purpose and secondly because why would government pay heavy cost to finance its domestic borrowings when funds are cheaply available. Policy makers are well aware that funding need is met by utilizing tax payer’s money that ultimately chokes economic growth.

While, so far banks did not adhere to Central Banks credit target to lend Rs One Trillion each to Private Sector and to Agriculture Sector and on an average it is short by substantial amount. It is worth mentioning that SBP in its various reports have often praised Banking Sectors performance in relation to Capital Adequacy Ratio (CAR) by highlighting that it is well within the manageable limits hitting 15.8 pct against minimum requirement of 11.275 pct and NPL’s too is at its lowest level, which is true. In the same context, Newspapers & Editorials too praised stability in Banking Sector and pointing NPL’s performances, which is 8.6 pct.

Further, the number depicts that it is surely sign of good health of the banking sector, but looking at the Deposit/Advance Ratio growth of last one year, it suggest otherwise because growth in manufacturing & industrial sector have been negligible.
This is why over last one decade or so inflation monster had eaten up all the money that also lead to sharply higher Discount/Policy Rate environment, which is why domestic debt sky rocketed to Rs 16 Trillion, though inflation is down since last 3 years.

Hence, job opportunities were not created, exports have declined, imports are on the up resulting shortfall in Revenue collection that has pushed Debt higher, reaching such a point that the economy can no more survive without foreign assistance.

GOP Auction/Target & SBP Liquidity Management

Banks are suddenly faced with extremely difficult situation if SBP sticks to its current liquidity management policy. They are faced with grave risk if SBP sticks to its auction target and simultaneously gradually lowers its cut off yield. It can easily monitor and control the market by widening of “Floor” and “Ceiling” rates.

Banks are no more in dictating terms and cannot afford to take risk by putting all the eggs in one basket. Better strategy for banks would be to start stretching its maturity profile by bidding in different tenors instead to clogging its entire amount in 3months, as they have been doing since last September. SBP will surly prefer to spread the maturity profile.

Banks should be aware that they cannot afford to make a demand for higher yields. SBP is well positioned that with a stroke of pen it can correct the market in one single move, by sticking to its original target if banks maintained its aggressive bidding stance.
In T/bills and PIB auctions it is easily manageable for SBP to leave reasonable amount of liquidity in the market and then offer bills of various dates to spread the maturity profile. Such a measure will leave a message for the market, it will then avoid speculating policy rate in future that will ultimately bring stability in the inter-bank market and banks too will start concentrating on lending to private sector.

I firmly believe that SBP should come up with a clear mandate to safeguard price stability to act to achieve its desired result. It should send clear signal that the non-standard measure of unorthodox monetary policy was temporary and it will remain focused on economic growth.

However, in the absence of Finance Minister, Federal Advisor on Finance Revenue and Economic affairs Mifta Ismail should also step in support of SBP and market and make sure that T/bills and PIB yields attains stability. It will surely help to reduce the burden substantially on exchequer and the nation too.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction)

 Pakistan’s Amnesty Scheme for Foreign Assets & Tax Package

 

by Asad Rizvi
@asadcmka

Tax amnesty schemes is basically a political decision and are normally launched in countries that are faced with severe financial crisis caused by revenue shortfall (External & Domestic) and because of unmanageable spending.
Tax schemes and repatriation strategies are introduced in expectation of quick large size one time gain and hence while implementing the amnesty scheme the program should focus on specific target and avoid money laundering risks.
In this decade such schemes were launched in USA and UK (2009), France 2013, Brazil (2016) and in Indonesia (2017). In 2009, Britain allowed those wanting to come clean they had to pay taxes plus surcharge of 10 pct. In France since its creation June 2013 that was closed on Dec 2017, a little more than 50.000 applicants declared their undisclosed assets of USD 38 billion that helped the government to collect additional USD 9 Billion in tax.
With election nearly 15-20 weeks away if held on time, PM Abbasi in his press conference announced amnesty scheme for foreign assets and easing of income tax package.
A country that has a population of nearly 210 million is solely dependent on indirect taxes due to its unwillingness and unfriendly policies to broaden the tax base. Just imagine against total registered 1.2 million tax payers total number of tax payers is 700.000 or 0.3 pct and this is possible only because 90 pct of the tax is deducted at source.
Reduction in income tax rate is a commendable move and a step in the right direction that may give relief to a tiny percentage of our population, but doubt people and businesses would volunteer to register unless serious efforts are made to widen the tax net.
However, decision that from now onwards Computerized National Identity Cards (CNIC) would be the tax number of citizens is healthy sign as it makes 120 million card holders eligible to pay tax. If intention is there then it could prove to be a very serious, effective and tricky move that should assist government to document the economy with some legal changes.
I have my reservations about the amnesty scheme for foreign assets. Rough estimate suggest that money held aboard by resident and non-resident Pakistani ranges somewhere between USD 150-200 Billion. SBP has already said that it does not have any legal channels for tracing money held aboard by Pakistanis, which is understandable because it is not under its jurisdiction that requires some sort of treaty between two countries to gather information and bring back the money.
-Initially people would wait to see the overall sentiment and will wait to see that if any petition pertaining to foreign asset or insensitive given is challenged in court. No one will come forward until there is clarity.
-The scheme may not be of interest to the person living and or earned money abroad because their earning is genuine and they have nothing to fear.
-It is clearly visible that the tax scheme has two purposes to broaden the tax net and to get foreign money held abroad.
-It is a known fact that good part of money is generated through illegal means, which will never be reveled. Hence such money will never be documented.
-One interesting observation is that remittance allowed per year is USD 100.000 per person. Based on 12 months calculation at current Rs/USD parity the working suggest that by rounding the amount exchange rate is based @ 120 per One USD.
-My best guess is that unless the amnesty scheme is countered at home with some legal issues, Pakistan could best fetch USD 3-6 Billion, which is mere 2-4 pct of the total anticipated money held abroad. It could be the promised and committed amount, which is why Rupee may have been twice devalued/depreciated by nearly 10 pct.
-Regarding request to provinces to abolish FBR DC rates. This is extremely good move in the right direction. I have been writing and demanding this move since 2005. But will provinces act on this request. Since the government has total control in Punjab province, if they are serious they should take the initiative and act immediately in best National interest.
-I do see risk of Dollarization in coming days/weeks

CONCLUSION

It is a calculated move before elections to buy time. Estimated amount of USD 3-6 billion will certainly help temporarily to maintain desired foreign exchange reserves level, which could push it well above USD 20 billion if money is timely received. Since obtaining funding from external sources is an extremely difficult task, this should give some respite.
Like many other occasions seen in the past, this is another effort to meet short term target, which if successful will be short lived, as economic challenges would continue to bother due to its growing size of Pakistan’s economy.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided.
However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).

SBP to Announce Monetary Policy

by Asad Rizvi
@asadcmka

Today’s Monetary Policy announcement is an extremely crucial one, as banks seems to have ignored a dangerous fact and they could be faced with a new challenge that would largely depend on SBP’s stance. Banks are betting on 25-50 pct Hike in Policy Rates.
Since almost nine months (FY 18), Fixed Income traders are so bullish on SBP Policy Rate that they have been constantly demanding Big Hike in Rate resulting sharp fall in medium to long term bank holdings of PIB’s.
This is why banks bidding pattern of PIB’s and T/Bills since last 2-3 quarters has been very aggressive. Since September 2017, Central Bank has been constantly scraping PIB auction refusing to entertain market demand to offer higher yields.
Constant demand by banks for higher yield is because of SBP’s continued Bullish statement/sentiment on inflation since almost last couple of years that did not meet its projected 6 pct target.
Surprisingly, SBP in its January MPS has once again projected average inflation of 4.5-5.5 pct and is targeting YoY to get closer to 6 Pct. It is hard to understand SBP’s logic of getting extremely bullish on inflation, as its current projection is looking wayward. It is because in this fiscal year until February 2018, 8-month inflation data is averaging 3.8 pct. I can safely say that inflation number will once again not get close to its lower target level and is expected to remain below 4.25 pct.
What is mind boggling is that if the reason of previous SBP Hike was due to higher inflation rate projection, which did not happen, then will it slash rates by 25 bp? The answer is “NO”, as it will not revert to counter its own decision.
The other possibility could be that because of widening trade gap there is severe pressure on country’s Fx Reserves and Pakistan could be preparing for its 17th time borrowings from IMF.

CONCLUSION

In this calendar year (2018) sizable payments are in pipeline, reserves are already depleting fast, election is knocking the door and hence, fund arrangement is a very costly and tough task. To give some sense about the cost, in 12-weeks time Pakistan’s Eurobond maturing Dec -27 moved from 6.72 pct to 7.82 pct, so imagine how would lenders respond if the country tries to borrow from external sources.
To ease pressure on Fx Reserves and Exchange Rate and simultaneously mange external payments, short term borrowing is well above USD 3 Billion to meet day to day businesses. It is already pain in the neck that may have exhausted by now and hence, additional borrowing may not be easy.
There is a possibility that SBP’s recent aggressive stance resulting sharp Devaluation/Depreciation of Rupee by nearly 10 pct in 100-days and 25 bp hike in Policy Rate despite inflation expectation well anchored and yet IMF’s annoyance through its press release could be a hint that the donor is demanding more action from Pakistan’s Central Bank before it gets engaged in funding assistance talk. In other words IMF could be simply asking for more hikes and further weakening of Rupee before its starts another discussion.

WHY MONETARY POLICT is CRUCIAL ?

 

Let’s keep in mind that after today’s SBP Rs 36 Billion Mop-Up @ 5.98 pct in 7-days against market offer of Rs 171, Commercial Banks are no more in dictating term, unless there is unwinding of Derivatives or surplus liquidity is injected in coming days.
Today for the first time since September 2013, SBP OMO has hit Zero level and instead it has mop up excess liquidity from the market. SBP has been constantly injecting liquidity since September 2013 that reached high point surpassing Rs 2 Trillion in December 2017. I consider this as a great achievement.
But a Billion Dollar question is that did Commercial Banks realize about the possible next move ? Smart Treasuries must have made a contingency plan to manage excess liquidity.
Hats off to SBP and it is worth mentioning that Zero OMO amount is for the first time after 4 ½ long years. Does this mean there is clear shift in SBP stance ? They are surely on the winning side, as risk has shifted on the other side.
As a reminder, it needs to be noted that Governor SBP has recently pointed that banks spending plan in this fiscal year is of Rs One Trillion each in Agriculture sector and lending to the Private Sector. Election is few months away. It could either be held in June or probably could extend until September.
If SBP does not hike rates today, then the current Bull Run will temporarily end. Market will rush like mad to purchase T/bills and PIB. In such a situation I will not be surprised to see 50-75 bp correction in PIB yields. Demand for government paper in next auction will surge, yields will gain.
A hike of 25 bp will give breathing space to banks and a 50 bp hike would mean tighten your belts, as IMF will not spare common man.
However, market will be keenly watching SBP statement on Exchange Rate. It is expected that SBP will let market know that how and when economy will benefit from Devaluation/Depreciation of Rupee.
(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction)

Another Failed Attempt to Malign Pakistan’s Economy ?

by Asad Rizvi
@asadcmka

 

Bloomberg report on Pakistan’s depleting foreign exchange reserves in comparison to USD 24 billion Cambodia and few others against Pakistan is a mere joke. (click on the link)
https://www.bloomberg.com/news/articles/2018-03-26/fastest-depleting-dollar-reserves-in-asia-to-slump-even-further
Similarly, on Feb 15, 2016 Faseeh Mangi author of above report then wrote that Pakistan’s risk of default has surged as it is required to USD 50 Billion Debt bill. The report was available on following link that has been removed.  http://www.bloomberg.com/news/articles/2016-02-14/pakistan-default-risk-surges-as-50-billion-debt-bill-coming-due.
I will explain to my readers that why March 27, 2018 report is misleading and it is an effort to damage country’s reputation, which is unacceptable, as element of unfairness is undoubtedly there that needs to be condemned.
Though true, that in recent times Pakistan’s market have been very turbulent, and Fx Reserves is fast depleting due to higher oil prices and widening of trade gap, as the economy has failed to keep up its pace. Political unrest at home and economic mismanagement is also a damaging factor.
Coming back to the yesterday’s Bloomberg’s report, with the current size of $ 310 Billion Pakistan economy that has a population of 208 million versus Cambodia’s GDP of USD 25 Billion, Fx Reserves of USD 11.2 Billion and population of 15.8 million. Azerbaijan, which is roughly $ 40 Billion economy, has Fx Reserves of $ 5.387 Billion and population 9.6 million.
Kazakhstan’s $ 135 billion economy has a total population of nearly 20 million has Fx Reserves of $ 31.4 Billion. USD 17 Billion is the size of Papua New Guinea’s economy that has a population of nearly 7.9 million and has Fx Reserves of $ 1.61 Billion. With Philippines GDP size is $ 310 Billion and population of 104 million and FX Reserves of $ 81.2 Billion.
However, it is naïve to discuss $ 1.31 trillion Australian economy in this category, which is amongst leading Developed Nation that has a population of 24.3 million and Fx Reserves $ 47.1 Billion..
The author should correct his numbers and note that the items included in Total Reserves are Foreign Currency Assets, SDR’s and Reserve position if any in the IMF and Gold is a part of reserves asset.
More importantly the argument is too weak that has no connection/relevance with each other, as economic conditions/factors vastly differ from each other.
Based on above facts they are in no way comparable. It would have made more sense if issues relating to Output Economic Growth, Human Development, Tax to GDP, Government Spending on Education, Social and Political Factor, Standard of Living, Poverty Rate, Unemployment, Social and Political Factors were discussed and analyzed. And more importantly “Documentation is Pakistan’s Mother of all the Economic Problems”.
(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).

Pak Rupee plunges by 10 pct in 100 days

by Asad Rizvi
@asadcmka

In 100 days, Rupee plunges for second time to hit 115.50 against US Dollar. Rupee that traded in 103.80 to 105 bands since December 2015 lost it sheen in early December 2017 that saw extreme volatility condition in the inter-bank market before settling down to hold around 110.40-60 levels. 10 pct depreciation of Rupee is a brave move, as present governments term expires in June.
Our history of Rupee devaluation/depreciation suggests that there is no reason to calculate much respite for the currency. Will someone tell me that what went wrong with the governments Strategic Trade Policy Framework 2015-18 of its ambitious plan to attain USD 35 billion export targets by fiscal year end June 2018? Why are we talking of new budgeted target of $ 24 billion exports? I am of view that our exports will struggle to hit $ 23.5 billion mark unless further concession is given to the favorites at the cost of tax payer’s money. Export numbers may get better by roughly 12-15 pct because of the strength of European currency that adds few more USD. Higher rice & wheat prices in international market are another supportive factor or else there is nothing new to add.
While, supporters defending Rupee depreciation is of view that it will help to curtail imports is surprisingly misleading without elaborating that how it will help to reduce imports. Our import bill always relies on oil pricing, which may not bring much needed respite in this calendar year (2018), as I am expecting further surge in oil prices due to better OPEC management, demand for oil will surge due to increased economic activity, but there is another big risk of worsening of Geo political condition in Gulf region, which should push oil prices higher.
Meanwhile, local demand for oil will add further pressure on BOP, CPEC related buying of machinery products is unstoppable and Rs 4.15 Trillion Currency in Circulation further confirms that there is amply of cash money available to purchase foreign goods. Our business friendly governments cannot put a halt on import of luxury goods. Hence import bill will remain a troublesome factor.

CONCLUSION

So where are we heading? What is the next direction? Are we on the right track? And how much will the economy benefit from depreciation? My answer is “NOTHING or ZERO GAIN”.
Our economy cannot make gains by depreciating Rupee, if this is true then Debt ridded oil producing Gulf economies would have weakened their pegged currencies or Venezuelan economy, which is in shambles would have been celebrating, which did not happen. Instead it’s the other way round because by depreciating its oil sale has not increased. Venezuela’s economy is suffering because they do not have strong industrial and manufacturing set up.
Similarly, by depreciating our currency Pakistan has nothing much to offer because of weak industrial and manufacturing structure.
However, one thing is for sure that by depreciating Rupee by 10 pct, future government is now comfortably placed to eat the cake when it makes the next big move, as domestic wheat, rice and sugar prices is almost at par with the international market price of wheat, rice and sugar. This is a launching pad as it gives enough room to hike support price in about a year or so. Who really cares about the common man in this country?
Therefore, people should get ready for a certain price hike in coming weeks or months, as it will push Petrol, Electricity and Gas bills higher. Transportation cost will rise. Automobile prices to go higher, Cement will become costly. Steel will become more expensive and this will push cost of construction higher.
Ultimately, Inflation will surge, interest rate will be hiked, External and Domestic Debt will touch new highs and Debt financing will become pain in the neck. For the next government it will be tough ask to hold Debt to GDP ratio below 70 pct.
Hence, Government borrowings will increase and for the next government the demand for Government Securities will increase, which will get closer to Rs 10 Trillion mark unless tax collection improves. SBP will have a tough task to reduce the injection amount through Open Market Operation (OMO).
Oh yes, due to change in Rupee parity. SBP Foreign exchange earnings will surely show hefty profit and some gains is expected in Collection in Custom duty, which will help to show rise in Revenue Collection. SBP will also benefit from increase in its sale of Government paper.
Depreciation of Rupee has surely paved way for another IMF borrowing and per IMF demand despite lower inflation number, SBP should soon hike its Policy Rate as SBP’s unannounced tricky “Forward Guidance” policy that does not guarantee stable economic condition because major part of our economy is undocumented.
And just to share, my past observation/experience that untimely Depreciation of Rupee, Hike in Discount Rate and Surge in Petroleum, Energy & Transportation prices proved to be “BAD OMEN” for Musharaff’s interim government costing to surrender. Readers may not agree with my point of view, but I suggest re-checking past record for more clues.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).

In Response to IMF Concern – Pakistan

by Asad Rizvi
@asadcmka

IMF in its latest press release has shown grave concern about the economy. It says Pakistan’s macroeconomic condition has weakened, pointing towards reduction in foreign exchange reserves and thinks, risk have emerged that will distort financial outlook. It is now demanding from government to refocus on its short term policies to minimize emerging risks and economic distortion through fiscal measures.
Is this the sign of economic meltdown or temporary worsening of economic condition? The timing is bad as elections are knocking at the door.
Recently, the country has been witnessing series of unfavorable events at home and abroad. It is partly because of poor economic management and recently it is largely because of poor representation and unsatisfactory management.
I am not sure that in present times who are Pakistan’s real economic strategists or the schemers, but it is the government policy guideline, which is the driving force behind any success or failure.
However, leave aside the Political factor. I do know that Ishaq Dar’s exit as FM at a crucial time has severely dented country’s ongoing Circular Flow of Economic Activity.
In my October 24 2017 note, I have clearly hinted that his absence will be badly felt as the timing is very odd. FATF mishandling is utterly due to complacent behavior and lack of understanding about the seriousness of the issue that demands proper follow up at various levels. Former FM would have been the best choice to fight the case/cause, as desperation of our representatives is clearly visible.
Coming back to IMF worry about the economy, it is a clear shift in its stance that has dented government’s positive tone/claim on economy, raising questions about the claim of high forex reserves, stable Rupee, record low policy rate, foreign investor’s keenness to investments in Pakistan or claim that several years of ongoing machinery import is a sign of future textile sector growth and or LNG is revolutionizing Pakistan’s energy sector.
Although, I have never agreed to IMF’s earlier OK version or clear chit given to Pakistan, as real economic benefit will never occur until industrial and manufacturing sector surges that did not happen.
It is mind-boggling that IMF boss Christine Lagarde during her visit about 17-months ago was full of praise and said Pakistan is now certainly out of crisis. She also said, “It is a fantastic step in your journey that you have achieved a better and solid economic position in a brief period of two years”.  She showed her concern about poor tax collection that has not yet been addressed accordingly, because ratio wise proportion of direct tax is close to 40 pct, which means indirect tax collection is 60 pct plus.
Further, can they explain or elaborate about FATF assessment/report, which is submitted to IMF and World Bank? Why IMF failed to mention in its report/press conference about Pakistan’s compliance anomaly/weakness with regards to the issue, earlier and now?
IMF has shown its is concerned about fiscal deficit surging by 1.4 pct of GDP, current account deficit has so far worsened by 0. 7 pct and growth missing its target by 0.4 pct. Tough IMF is happy that if not 6 pct, but short term growth of 5.6 is attainable due to improved power supply.

Please allow me to explain.

At the time of last Budget preparation, when the economic target was projected, oil was trading around $ 45. My observation is that in current fiscal year, when IMF is itself comfortable about growth due to improved power supply, it also means increase in import of energy related machinery and simultaneously oil bill too will inflate, as oil prices on an average during this period is up by $ 10 plus and hence, demand for Oil/LNG has increased/will increase accordingly.
Both scenarios will add substantial pressure on Pakistan’s Foreign Exchange Reserves because of rising import bills and slow growth in exports. Exports slowdown is because of flawed export policy and for not being competitive in international market. Neither bank provides enough funding or made an effort to attract new businesses to the Private Sector for industrial and manufacturing sector to grow because of SBP/MOF friendly policy towards banks as they are heavily dumping liquidity in GOP.
Decade old trend will suggest that such policy is intentionally devised so that all the money that is created in the banking system is only parked in government paper to contain deficit at the cost of growth that may have helped exports to grow and improve revenue collection ratio.
IMF can’t have the cake and eat it too. When IMF in its statement says it is comfortable with the pace of short term growth, which I am presuming is until end of current FY 20017-18, as it is of view that energy sector will support growth, then IMF should not complain about imbalances and fiscal slippages, which is causing is pushing fiscal deficit and current account deficit higher.
I have earlier in FY Budget write-up deified IMF projection that remittances will not suffer and it is doing remarkably well against its expectation.
Unfortunately, IMF does not put tough condition to improve tax collection or gives a target to refrain from imposing indirect tax or give time period to reduce dependency on indirect tax and compel governments to increase direct tax by taxing all income. The real need of the hour is documentation of economy that also fulfills FATF demand to greater extent. Why is IMF mum on the subject?
-Why doesn’t IMF show its concern that various governments (past/present) have failed to address the Circular debt issue that has reached nearly Rs 1 Trillion?
-Have a look at the banks deposit to advance ratio for guidance that should be around 65-70 pct instead of 51 pct. Higher ratio will give the much needed kick start to the ailing economy.
-Banks Holdings of Government Securities of Rs 6.85 Trillion clearly tells that where is the fault line bask.
-There was/is no justification of Policy Rate Hike. Like in past SBP is once again caught wrong footed about reading inflation trend, which is down. SBP hiked its Policy Rate by 25 bp in its last announcement and February’s inflation fell down to 3.8 pct versus 4.42 pct in January. The stance is truly mind-boggling and questionable too about the Policy Rate Hike urgency because hike in rate ultimately hits the ever rising Domestic Debt breaching FRDL. For reference, FY 17 average inflation was 4.16 pct and in 8-months (FY18) it is averaging 3.84 pct. So what compelled the SBP Monetary Policy Committee to take such an extreme step when elections are at the doorstep?
-Similarly, why is IMF always demanding depreciation of Rupee?
-Will IMF identify advantages and provide details of economic gain the country has made during last 10-12 years by depreciating Rupee by more than 75 pct?
-How did the economy gain from depreciation of Rupee, as how many jobs were created?
-How much was the tax earnings due to depreciation of Rupee?
-And finally what would be the size of economic gain by further weakening of Rupee?
My argument is that since Pakistan is not a manufacturing economy weakening of Rupee does not make it competitive. It is just like weakening of its currency by an oil producing country, but it does not attract oil buyers or else Venezuela’s economy would have being doing wonders. Nor the condition is yet ripe to attract tourism in Pakistan.
Therefore, I suggest if IMF is really concerned about Pakistan’s economy and is concerned about the well being Pakistani nation then IMF should re-visit, update its policies and procedure that will also assist IMF’s global client or else its current ongoing policy is only good to cripple borrowing economies rather than doing any good to them.

https://www.dawn.com/news/1393806/imf-concerned-at-pakistans-weakening-economy

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).

FATF Challenge for Pakistan

by Asad Rizvi
@asadcmka

Hopefully consensus will be reached to block US intent to place Pakistan on watch list blaming Pakistan that it is financially aiding terrorism.
According to WSJ, US is making effort for fresh Vote on action against Pakistan, as meeting will continue until Friday. If Khawaja Asif twitter message is correct then this is temporarily good news.
Pakistan should thank all its supporting foreign friends for not jumping into the US sponsored bandwagon.
But Pakistan surely has a difficult task ahead because the breathing period given as per FM Asif is 3-months, after which another report is due to be submitted in June to the Financial Action Task Force (FATF) to monitor Pakistan’s progress.
The demand is big from the 37-members group to correct long list of decade’s old financial deformities in 90-days, which is not sufficient to undo the ills.
Putting Pakistan in a FATF watch list is a disturbing fact. The timing is bad and the challenge is immense as odds are unfavorable.

The big question is how to tackle & what are the risks involved ?

This are quite a few risk involved and the situation is alarming as rating agencies and donors are constantly monitoring and watching the day to day developments. Rating agencies normally take time to assess the situation, but let’s hope that for the time being, donor agencies stay away from taking any pro active measure until there is clarity.
Right now Pakistan is faced with serious compliance issues, which is caused due very casual and complacent approach by the respective concerned authorities at all levels.
In today’s financial world, there is a severe fight to curb the menace of money laundering and terrorist financing, which cannot be ignored at any cost.
From Global watchers perspective, they take serious note of all cash transactions and daily activity in our kerb market is sizable. Hence, they suspect parallel market activity in our part of the globe, simply because large part of our economy is undocumented.
On the basis of size of our labor community working abroad, Pakistan may have good reason to argue supporting its parallel market activity. But due to circumstances around they will have to justify trading activity in a convincing manner since large part of our labor population is working abroad, their families reside in rural area and most of them do not have access to banks.
Therefore, they do not have any other choice and are compelled to use non banking sector to send money to their families.
The problem is that such types of argument may not be very appealing for the monitoring agencies because of domestic and social unrest caused by numerous internal and external unfavorable factors, which makes parallel market activity suspect.
Foreign currency deposits accounts maintained by banks in Pakistan are another discomforting factor for the monitoring agencies because of huge cash activity involved. Though, majority of the account holders are genuine in nature, but feeding account though cash buying from the local market puts some doubt on genuineness of the transaction.
It is worth mentioning that more than 50 pct of the total US Currency is out of USA, which make it is almost impossible to keep a track of cash money and completely halt illegal global activity, which is considered lucrative business. In this scenario Pakistan too is at disadvantage falling prey to the menace.
However, monitors need to understand that with estimated number of overseas Pakistanis reaching nearly 7.6 million, it should not be solely blamed for all financial wrong doings. It is worth notifying that Pakistan is a “Cash Economy” and good part of financial transactions is carried out in cash.
Therefore, in current environment it is almost impossible to have full control on cash, unless documentation process gathers momentum at the fastest pace.
Here I would like to give another example, since decades the country has been struggling to maintain high level of foreign exchange reserve to cover its 6-12 months need, hence it has a lenient approach towards local market traders to purchase foreign currency from the open market to buy some of the foreign items.
Putting complete restriction on open market would mean Pakistan will have to impose restrictions on large number of imports. Restriction would ultimately create severe unemployment problem. Open market also provides cover for using Credit Card facilities abroad or all airline related payments such as tickets or Hajj are mostly covered from parallel market.
Central Bank that has played major role in maintaining high remittances inflow along with the Fiscal Mangers should formulate a policy to encourage Pakistani’s living abroad to open new foreign currency account by offering expatriates some sort of genuine incentive that should be eye and attractive too. Depending on sizable hot money or by announcing unpopular amnesty schemes have always backfired and are not productive.
It is SBP prerogative and responsibility to inquire about unusual large size foreign currency activity, which should always be questioned. It is high time that Pakistan’s Central Bank should act quickly and ask banks to close all risky and shady accounts.
Further, it is the need of the hour that SBP should immediately close all the loss making purposeless overseas bank branches.
Measures should be taken to gradually reduce all undocumented trading activities weather it is real estate or any other type of trading activity. Unless efforts are made to plug holes problems will persist.
Pakistani regulators/monitors and all those managing country’s financial affairs should come forward to rescue the system and punish the real culprit responsible for pushing the country towards the wall that has brought bad name to nation. Globally, there are numerous examples that many culprits and wrong doers have been fined, punished and sent to jail, depending upon the nature of crime.
However, it is extremely sad and unfair for the FATF that it is exerting extreme pressure on Pakistan at a wrong time when Pakistan is itself victim of domestic and foreign terrorism. My estimate is that Pakistan has lost nearly USD 347 Billion by engaging itself in war in terror.
If FATF puts Pakistan in a watch list blaming it for financially aiding terrorism then Pakistan will be faced with severe hardship, as rating agencies will become active, donors may not be willing to fulfill their commitments. Banking transaction (overseas) will become a very costly affair. Foreign investors will refrain from investing in Pakistan that may result sharp depletion of foreign exchange reserves.
If the world decided to punish Pakistan, then Pakistani politicians should also respond collectively by passing a bill in National Assembly not to participate in war in terror related activity. It should announce closing of its border and tell the world it in best National interest, it has decided to first make amends at home to clean all the mess.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).

Why is the USD depreciating Vs other currencies ?

by Asad Rizvi
@asadcmka

Well, normally when economy performs well & interest rates hiked (3-times in 2017) it is supportive for the currency. Though pace of US economy accelerated in the last quarter of 2017, but threat/risk of government shutdown was weighing heavily on the Greenback that was spoiling the party.

After Trump slapping tariff on washing machines and solar panel, US Treasury Secretary’s statement that “a weak US Dollar is good for USA” added fuel to the fire.

Further, US bond yields has picked up in recent months. This followed after China major holder of US Treasuries reduced its bond portfolio. Earlier there was also some signs coming from China about its willingness in support of the move that was later denied that added pressure.

Overall, investors are required to keep a close watch on European growth too, which is performing at a much faster pace and continuation of trend will compel tighter condition in Euro-zone too.

Therefore, unless US economy performs extraordinarily or gain of European economy eases US Dollar is likely to remain under pressure for some more time before bouncing back.

https://www.quora.com/From-a-fundamentals-or-macro-perspective-why-is-the-USD-depreciating-against-other-currencies-from-the-end-of-2017-until-now/answer/Asad-Rizvi-22?share=41309ab8&srid=h9qiJ

How large National Debt is sustainable before Financial Collapse ?

by Asad Rizvi
@asadcmka

There is no benchmark as such that what size of debt can lead a country to bankruptcy or collapse because of the bias global authorities, Central Banks/Regulators/ Rating Agencies approach.

This was witnessed after 2008-9 European meltdown as, Greece that had deliberately misreported and cheated the global financial market/authorities by providing incorrect data was instead given extraordinary support by the European Commission. The commission simply showed its helplessness by stating that it lacked audit powers relying on goodwill and integrity for data provided to them.

Greece was given 3 bailouts of EURO 246 billion. In 2009 the size of its debt was 109 pct that has surpassed 185 pct. In this case rules were surely bent. It was obviously done for political reasoning. The authorities/regulators did what was “Easy” and not what was “Right”.

I would add that such measures are self created Financial Problem that ultimately leads towards isolation. Instead of blaming other, Regulators/Central Banks/ Financial Authorities/Rating Agencies/ are responsible for causing mess.

Here are the list of factors that caused/causes Financial System to crack…….

#Violations

#Breaches

#Flawed Audit Report

#Weak Risk Management

#False Rating

#Change of Accounting Rules to accommodate the violator for Wrong Doings #Artificial Compensation.

#Longer Maturities of 25 years with 10 years grace period was intentionally offered to Greece to buy time, which is curse for the future generation.

The global financial suffering is because instead of Lending Money to Corporate Sector for Stimulation of Economy, cheap QE money was/is given for Bank Capitalization by making excuse that funding is provided to protect the industry from collapse.

Japan has the highest public debt of well above 240 pct. Italy, Portugal, Singapore, USA and Belgium is above 100 pct.

USD FATE as Reserve Currency:

USD which was a whisker above 70 pct in 1998 as a reserve currency was gradually losing its gloss and dipped down to below 62 pct in 2009 due to poor economic condition has once again regained some of its strength on back of European turmoil and due to US economic recovery is currently hovering above 64 pct.

In view of global economic development with Europe and Japan struggling. UK is in a Brexit fix and I believe China still needs over a decade or two to catch the advance economies to attain top slot, I do not see US Dollar succumbing to any other external pressure. Rather combination of Monetary Policy by the FED and Fiscal Stimulus will play major role to contribute US growth.

Please Don’t Cheer Depreciation of Pak Rupee

by Asad Rizvi
@asadcmka

I am quite baffled with the timing of 5 pct depreciation of Rupee against US Dollar (in 3-days). In my view the move to weaken Rupee is purposeless in economic sense. There is nothing to cheer about, as depreciation of Rupee will slash standard of living and bring more misery unless fundaments are completely changed.
The strategy of weakening of Rupee is a futile exercise as there is no evidence of economic gains in the industrial and manufacturing sector. This is why growth in Revenue collection has always been difficult to attain and Tax to GDP ratio is appallingly low. Neither weak Rupee has ever helped in halting imports, as often claimed.
It is because our economy is totally dependent on same old erratic strategy that had been governed by homogeneous polices since last many decades. Excessive austerity of fiscal policy in this decade proved to be meaningless that may have pleased the lenders/donors only.
However, ongoing decade old policy is the major cause that has dented the economy badly as it had ultimately choked real prospects of economic growth due to liquidity constrains (Domestic and External). Unfortunately the move had neither helped to contain deficit that had eventually squeezed tax collection due to fall in output.
The underline cause of economic difficulty is surely caused by years of irresponsible approach towards economy. Instead of playing a role to stabilize the economy, the policy shift to focus on deficit for the sake of conditional IMF borrowings has backfired.
In the face of slack economic condition that can be determined by continuous fall in Deposit/Advance ratio since a decade, loose monetary stance could have played major role in boosting the economy, with a medium to long term plan for reducing the government deficit. Instead of allowing it to become endemic, priority should have been to create new employment opportunities.
If we carefully assess the global economic condition and closely monitor the global economic data, since over a decade though the key focus was/is to reduce the high government deficit that demands higher interest rates, in reality despite exceptionally high deficit and higher inflation rate, proportionally interest rates are unprecedentedly and intentionally kept low to halt rising debt and to boost the economy.
The lesson that we should learn is that austerity not only discourages investments, it compels slash in budget, choke growth and hampers business confidence.

CONCLUSION

The truth is that there is no single exchange rate regime, which is considered best or most successful exchange rate mechanism. It is for the country to adopt the exchange rate regime that suits best for its requirement.
If we see the timing of Rupee Depreciation, it is certainly a very a brave move, since the government approaches elections. But weakening of Rupee, which could be based on Real Effective Exchange Rate (REER) and or exporters demand is unlikely to bring respite to the economy, as Pakistan’s economy gained nothing in last 10-years after 77 pct depreciation of Rupee vs USD.
There have been quite a few arguments by various so called Pundits that have been arguing until recent that the economy is doing wonders are now proclaiming that Rupee should have been depreciated long before.
I would like to ask them that then why they have never ever demanded appreciation of Rupee if the economy was earlier doing exceedingly well ? Does 77 pct depreciation of Rupee in last 10-years or so means that the two elected government’s economic policy was a total failure and Musharaf’s economic performance was far better? I am open for discussion.
Depreciation of Rupee is only a heavenly situation for Exporters, as export financing rate is at 3.5 pct and with 5 pct depreciation they earn clean spread of 1.5 pct unless more depreciation takes place, which will further add to their gains.
The biggest gainer will be the government as at current rate and with USD 20 Billion Forex Reserves, SBP earns exchange profit of roughly Rs 110 Billion. SBP may end up with record profit that should exceed total profit of the Banking Sector.
In return this will help the government to pocket extra income to meet their Tex Collection shortfall.
Let’s not be fooled by the expert comment from the receiver of best equity broker who joined me today on AAj tv and was commenting that import of car will drop. Is he telling the market that Automobile sector will take the beating? Then what about Cement and Energy sector, which is heavily dependent on import? Is stock market heading for collapse? Nothing can stop imports unless there is a policyshift.
Yes, this could be another election gimmick, as depreciation of Rupee will give space to increase food support price.
In 2018, the global commodity prices is likely to remain from stable to slightly up, but any increase in support price will spoil the party, which looks a good possibility due to coming election if held on time.
Overall due to higher trend in commodity prices, export bill could inch up by a Billion or two. But if oil price averages around USD 55 per barrel, domestic demand for electricity and CPEC related purchases will add pressure. Profit repatriation, Debt and interest related payments will add further pressure on Exchange Rate.
Due to developments in Gulf region, I am looking for mild increase in remittances that may give some respite to the exchequer.
However, I would like to point out that Depreciation of Rupee was one of the major causes of Musharraf loosing the elections, as the impact of weak Rupee lead to higher petroleum cost, higher electricity bill and surge in transportation cost, higher food prices, which means higher inflation. This is the high price that government will have to pay for minor gain at a very crucial time.
Bottom line will tell that the exporters/commodity producers will be the only gainers against Rupee depreciation and the people and economy will be the ultimate looser or sufferer.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).

 

Pakistan Bond Sale, Time to Celebrate ?

by Asad Rizvi
@asadcmka

Pakistan will gain some breathing space from pressure of financing a large budget deficit after successfully raising USD 2.5 Billion denominated 5-years Sukuk worth USD 1 Billion @ 5.625 pct and 10-years Euro Bond @ 6.875 pct.
Despite all odds due to ongoing domestic unrest, trouble in two of its neighboring borders and rating agency warning/reminding of political risk, the country did manage to attract highest ever bids.
The pricing has surprised forecasters making their predictions wrong. This time Pakistan was able to sell its paper at a much advantageous yield.
Against sale of 5-years Sukuk in Oct 2016 and against 10-years Euro Bond in April 2014, then cost was higher by 4.22 pct and 5.55 pct respectively against US Government Bond.
This time despite hike in US interest rates, cost wise burden on exchequer will ease as 5-years was higher by 3.555 pct and 10 years was higher by 4.545 pct respectively, which is price wise preferable.
What bothers most is that country spends a notch below 30 pct of its revenue on interest payments, around 32 pct of with its debt is in foreign currency and another 32-35 pct of borrowing is required to meet its requirements. It all provides good hint that at this pace fiscal deficit will hit 5 pct by June 2018.
There is lot of talk about CPEC, but I am not expecting big gain in medium term. What is more worrying is that any minor gain in export will be eaten up by the oil bill, as higher domestic demand and higher oil prices in the international market, which is likely to linger on for another 3-6 months before easing of oil prices may inflict damage to the economy.

What Caused Demand for Pakistani Bonds ?

I would pick two major international factors that helped higher participation in Pakistan Bonds.
Due to lower oil prices Investors were hoping for huge bond auction from Gulf oil producing countries to finance their deficit. This is why, last year in April we saw Abu Dhabi taping USD 5 billion to plug its deficit. In May 2016, Qatar faced with similar situation raised USD 9 Billion paying 120 and 150 bps in 5 and 10 years over US Treasuries. Oman too, which is the weakest oil exporter had to pay 190 bps for 5-years, 300 bps for 10-years bond and 387.5 for 30-years for its bond.
Similarly, Saudi Arabia in April 2016 raised USD 19 Billion from its Domestic and International Sukuk Bond market and again in September due to financial constrain caused by 3-years old oil slump, we saw Saudi Arabia entering bond market by paying spread of 110 and 145 bps in 5 and 10-years respectively.  It is targeting balanced budget 2020.
The budget pressure is so immense on the Middle Eastern oil producing counties that this year bond was tapped by almost all, Bahrain USD 3 Billion, Iraq one Billion after a decade. Jordan and Kuwait too joined the bandwagon.
Since September 2016, oil prices on an average is up by more than USD 15 and is comfortably averaging well above USD 50 or is nearly 50 pct higher that has given respite to the M/E oil producing countries.
Amongst the good lot of investors, quite a few investors that have been holding liquidity and eying Gulf countries for bond sale must be aware that the sale of bond in the region will likely thin down in near to medium term because of higher oil prices.
We cannot ignore the fact that the development in Saudi Arabia is another big reason after its anti-corruption purge stance. It is more likely that the Saudi’s government’s kitty will fatten that should ease financial stress to a certain extent.
While, investors in the region must cautious and some may even consider temporary shifting of their asset portfolio, which could be blessings in disguise that helped flow on funds in to Pakistani bond market. It’s still a good opportunity for the country that should not be missed due to lack of perspective.
However, we have to realize and open our eyes that the economy cannot borrow forever to finance its deficit. Banks will have to put a halt on its investments in government securities. Pakistan desperately needs to address its obsolete business structure, stop the noise from popular business press and will have to dismantle old business and reinvest in core. It will then help to prepare a wall to determine that what is required to generate profit in a business.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).

Pakistan Economy in the Doldrums !

Asad Rizvi
@asadcmka

Why are we so worried about widening of Trade Deficit? Then why are newspaper columns always praising about growth in telecom sector, auto sector, cement sector, and booming construction business?

Soon after the launching of AAJ Tv Channel in 2005, I was anchoring a TV talk show and my guest was SBP Governor, it was the first show of its kind. I was worried about the rising Trade Deficit trend and I hurriedly asked him, as imports was surging against our exports. It was because oil prices then broke crucial technical and psychological barriers of USD 60 per barrel.

I was lectured that it’s an encouraging sign as import of heavy machinery mostly pertained to textile sector that was expected to do wonders in future. Unfortunately despite numerous types of incentives provided in past (Heavy Depreciation of Rupee by 75 pct and Sharp cut in Export Financing Rate by 7 pct) our textile industry still carries long list of demand and is glued to outdated technology. During this period its Regional competitor India, Vietnam and Bangladesh roared ahead, as its current global textile export shared increased to 4.9 pct, 4.2 pct and 4.2 pct respectively, whereas Pakistan’s textile share slumped to 1.7 % from 2.2%.

Few months later in another Tv talk show, while interviewing an important government official that was also advising Pervez Musharraf on economy, I showed my concern about hike in wheat support price that had pushed prices of bread (Nan) from Rs 2 to Rs 2.5 per Nan.

I was told that hike in wheat support price will help to arrest wheat smuggling to Afghanistan, as 2 million tons of wheat was smuggled annually. The trend of hike in wheat support price continued till date, but smuggling never halted, instead there is a rise in smuggling, whereas, Nan is presently sold for Rs 9-10.

While, in June 2008, as oil prices continued to climb to a record high levels breaking USD 142 per barrel, motorist in Pakistan were encouraged to focus on wonder fuel that was introduced in the 1990’s, as an alternative to Petrol, Compressed Natural Gas (CNG) hoping to lower oil bill.

I was never comfortable switching to CNG fearing future gas shortage and hence, defended against all odds in my various talk shows. Today, estimated motorist is around 3 Million. No one is keen to invest in this industry, as all indications suggest chronic gas shortage restricting to gas rationing. It is a double whammy as electricity is required to operate CNG gas compressor. And to give you a hint that how it is hurting the economy, LNG import increased from USD $ 570 Million 2015-16 to USD 1.3 Billion 2016-17.

Similar is the case with Telecom and Construction industry, which is totally dependent on foreign products (nearly 70-80 pct), which is now a huge burden to the economy.

Despite easing of oil bill after October 2014 crash to nearly half the size, high oil consumption is a pain due to friendly import policy that eats 50% of our exports.

While, we still boast that we are agriculture country, but we have nothing really to offer/discuss due to outdated equipment and obsolete stance as the economy totally rely on “The Political Economy of Agriculture Price Policy”. Hence, we are only able to export Wheat, Sugar & Rice by allowing heavy cushion or by providing support through off market price.

Regrettably, despite extraordinary type of subsidies given to the agriculture sector, the country is unable to meet the international standard. These are the major factors, which is why we are not competitive and do not attract foreign buyers.

This is why due to policy flaw and outdated products, Rupee depreciation never gave and will never give boost to exports. Neither weak Rupee will halt import, as the economy cannot put brakes on purchase of oil, machinery and equipments.

While decade old history would tell that Shaukat Tareen has been talking of targeting 15-20 pct Tax to GDP and Rs 500 to Rs 1.000 Billion Corruption (annual), but till date nothing has changed and with ongoing attitude nothing will ever change in next 10-years if we continue to with the existing Policy/Politics. Instead, at current pace in 10-years Local Debt will Hit Rs 32-35 Trillion. External Debt will surge to USD 130-150 Billion and annual Deficit financing will be roughly around Rs 3.5 Trillion. Higher Policy Rate will bring more misery to the economy, unless sharply reduced.

Therefore, Policy makers (Monetary & Fiscal) should not be misguided by the Macroeconomic indicators, which is well supported by the window dressing. It is rather preferable to look into the Microeconomic indicators for genuine guidance.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).

 

Pakistan Economy – Economic or Political Bickering !

Asad Rizvi
@asadcmka

Suddenly voices of protest are heard from all over the country denouncing current government’s economic policies fearing “Fiscal Stress”. The worsening of economic condition is not the result recent happenings.

The fact is that the crack in the economy started to appear more than decade ago caused by Fiscal difficulties. It is because during difficult times our economic managers always went for the easier option i.e. “Structural Adjustment”, which is the IMF recipe, whereas, our economy demands “Structural Reforms”.

Though country is not facing Debt crisis right away, but signs of “Fiscal Stress” often referred as Debt crisis relating to Debt Servicing are clearly visible, as governments over last decade or so to its service debt were totally dependent on Domestic and External borrowings.

Main purpose of excessive Domestic borrowings by respective governments is to finance debt that does not give free hand to spend and to stimulate economy, while major purpose of External borrowings is to service Foreign Debt rather than helping industrial and manufacturing sector to grow, which is country’s dire need. Overall this strategy helps to contain deficit at the cost of real economic growth.

However, this situation has caused severe economic damage/suffering to the economy having overall negative impact. It severely jolts Revenue collection pushing the tax base to lower trajectory. Subsidy are given for compensation purpose, which is unproductive, as it is not result oriented, but is good for political reasons and hence, it is sheer waste of money. Falling exports is because of obsolete method/technology and policy flaw that has no scope of improvement if present stance continues.

SBP’s prolonged Hawkish policy stance over a longer period of time has further worsened Debt and Servicing condition because of higher government borrowing cost. Expensive external borrowing added fuel to the fire.

Some may have reservations about the term “Fiscal Stress”, as inflation is too low, but realistically there are numerous worrying data/factors such as severe liquidity crunch, which cannot be managed without regular Open Market Operation (OMO Rs 1.435 Trillion-Current) injection and SBP Forward/Swap ($3.9 Billion) transactions to generate Rs & USD liquidity. Market is extremely concerned that SBP has not updated on its website its International Reserves/ Foreign Currency Liquidity position that shows data as of May 31, 2017 and fears that number has substantially grown.

Further, it is worrying that despite low inflation rate since last couple of years pressure has not eased. Constant Rescheduling of Loans and Circular Debt, Continuous Government Borrowings at higher rate including Coupon (T/bills, PIB & Sukook), frequent Rollover or fresh external long term borrowings with combination of short term loans and persistent approach towards IMF over last 3-decades with minor breathing moments is enough reasoning to support my argument that the economic condition is alarming.

While, Forex Reserves will remain vulnerable due to growing size of our debt burdened economy that totally relies on foreign borrowings (minus exports & remittances).
Lack of consistent income and in the absence of income source it will continue to add pressure at the time of interest payments of foreign loans, maturity of foreign borrowings and profit remittances.

Causes of Economic Unrest 

Political egoism at all levels is the root cause of social-political chaotic unrest and economic distress. Parliament which is supposed to be the real place for elected representatives to legislate reforms is mostly found short of quorum.

Sadly, people’s unresponsive behavior to counter against all odds has caused lot of damage, as they have never seriously raised their voices disapproving respective government’s unacceptable activities that have caused pocket pricking.
In 10-15 years, no government has ever bothered to take any serious measures to strengthen their safety net system to undo the wrong practices.

Egoism and corruption is continues to flourish, it has become the basic norms of our sociopolitical life. Acceptance of bribery has become such a common thing that I will not hesitate to add that it is an “Unconstitutional Cult” as it is no more considered an immoral act.

Watching daily Tv talk shows, viewer can easily sense that politicians are mostly preoccupied in projecting their own affairs to meet their desire by targeting opponents. They are least bothered about the poor class (poverty) of our society, which is majority in size.

Role of Finance Minister

I don’t want to mix-up economy with the ongoing FM’s court cases that has nothing to do with my article. In my opinion FM Isaq Dar is a shrewd Financial Manager and a successful negotiator. The purpose of this article is not to defend Isaq Dar. This write-up is purely in National interest to indentify the mistakes and let the readers know the facts and it is for them to decide.

The real truth is that soon after joining PPP –PML (N) Collation government in May 2008, Isaq Dar clearly sensed Pakistan’s financial hardship and knew that he will not be able to get support from PPP lead government, nor he can act on his own, he quickly decided to quit the job.

Coming back to the recent ongoing debate regarding Dar’s role in economy linking it with Pakistan’s excessive foreign borrowings and alarming “Rise in Debt” that has inflicted severe damage to the economy. I partly agree for not adjusting to some of the fiscal demand/needs.

I will put the blame on current and past governments. Our “National Assets” was sold for peanuts without formulating future strategy. I will hold governments and its representatives of recent past for causing damage to the economy that wasted Billions of US Dollars in promoting consumer culture in the country instead of building infrastructure and industries.

Unfortunately, protesting Parliamentarians of past and present have never raised their voices on the National Assembly floor about financial irregularities or wrong polices by tabling the bill and hence, they are equally responsible for inflicting financial damage to the economy. It is always easier to find a scapegoat and blame others without any sound reasoning to gain political mileage.

Window Dressing and Fudging

Window Dressing (WD), Fudging or for Creative Accounting is a very common practiced all over the world. It is true that economies cannot survive forever on Window Dressing.
ECB, FED, BOJ and UK intentionally opted for Unorthodox Monetary Policy Stance and preferred Conventional Method of Ultra Easy Monetary Policy and doses of fiscal stimulus to avoid further damage and support their respective economies. Is this not Window Dressing?

I would like to remind readers that Bloomberg L.P filed official complaint against FED in November 2008 for USD 2 Trillion worth of secret loans to banks? Accounting changes were officially allowed by UK authorities after 2008-9 crises, which are also fudging.
LIBOR, which is supposed to be the benchmark interest rate used around the world that could have influenced interest rate on estimated USD 800 Trillion in loans and investments, is the most recent dirty fudging case.

Voices around the world were never raised when oil was @ $ 145 per barrel and Gold hitting all time around $1917 per ounce. Is it not amusing that then inflation in Europe was 2.75 pct &in USA 3.25 pct and interestingly ECB interest rate was @ 1 pct and FED rate was 0.5 pct, which is not as per normal practice.

Above example is evident that everyone supported misreporting in their country’s National interest because it is part of the accounting strategy to save/halt the country/economy from for further deterioration or possible emerging crisis.

In this type of situation no one cares about the Depositors interest that they are getting negative return on their deposit, as higher interest rate means sizable rise in National Debt.

Therefore, in my view, the biggest setback to the Pakistani economy over the years is the result of lag monetary policy approach that has encouraged banks to reduce its corporate lending portfolio and shift and investments in Government Paper, which is reduced to 52 pct from the highs of 76 pct of the Loan to Deposit ratio and allowing banks to invest major part of their money in government securities. We should take a leaf accept our mistakes and adopt similar strategy by slashing our policy and coupon rates gradually by 300-400 points. On an average 3 pct cut will ease servicing of domestic debt burden by nearly Rs 250 billion plus. It will arrest the pace of rising debt or else at current pat by 2021-22 country’s debt will easily surpass Rs 35 Trillion

How and Why the Trouble Began

In my view, unnecessary weakening of currency and higher discount/policy rate is the spoiler of our economy as both turned out to be nightmare for the economy and public in general. Weak Rupee never helped exports, but pushed inflation to sky-high levels, made common man’s life miserable, as everything is out of his reach and higher policy rate halted new businesses to grow.

If we did deeper look at our past, soon after the 9/11, Pakistan’s economy started picking up as remittances inflow was pouring in the country fearing backlash. In the KERB market foreign currency was flooding due to Afghan factor and then came a point that US Dollar was cheaper in the Kerb Market Rate than the inter-bank rate, while the economy also started to pick up and was stable for nearly 3-years.

The trouble began in the 2nd half of Musharraf’s era, as Pakistan’s Financial Managers became too complacent without realizing that nothing is permanent. During this period, the size of economy surpassed USD 100 billion marks. Pakistan’s FDI in that period pocketed roughly around USD 50 Billion.

While, our Financial Managers failed to realize that the country is meeting all its funding requirements by selling its Nationalized institutions and through higher inflow of Remittances. Pakistan has never made big strides in Exports because of obsolete technology. Textile sector too did not invest in modernization of its industry. The country hence could only offer raw material.

They totally failed to maximize the God gifted opportunity to bring structural changes and modernize its agriculture and industrial sector.

Policy makers did not even pay heed to the rising oil prices that were surging sharply in the international market that has wiped out Pakistan’s gain.

The country failed to capitalize from the God gifted opportunity, as focus instead of shifting towards manufacturing and industrial sector and to bring structural changes tilted towards consumer side.

Pakistan Debt, Borrowing and Bickering

In Pakistan, norms differ. We try to “Make a Mountain out Of a Molehill”, but do not want to accept mistakes/blunders. With ongoing policy, every Finance Minister will be faced with similar situation and will continue to face music and economic condition will worsen, unless the nation is prepared to bite the bullet.

Right now rising debt may not be a crisis, but it a serious emerging problem in relation to size of income receivable and GDP. The honest fact is that our political system cannot handle rising debt burden that demands non-nonsense management.

Honestly speaking our Fiscal/Monetary Managers in last 30-years have never ever thought of the price that the nation/economy will have to pay for maintaining extraordinarily High Discount/ Policy Rate. If we take the compounding factor of last 15 years, higher policy rate may have roughly cost exchequer nearly Rs 4 Trillion, which is why Domestic Debt has hit Rs 15.389 Trillion plus RS 467 Billion Provincial borrowings banks versus Rs 1.8 Trillion (2002) and External Debt $ 76.5 Billion and combined debt servicing at current pace will surely hit Rs 2 Trillion vs total debt servicing of Rs 365 Billion in 2002.

Our problem is that policy makers never have realized that unnatural higher interest rate has no merit and makes servicing of loans costlier, which will make lives of our future generation miserable. With ongoing complacent approach and no change in stance I am targeting combines debt to surpass RS 35 Trillion by 2021-22.

My question to all the critics is that when we have 1.2 million tax payers or 0.57 of the total population and with major part of the economy undocumented and the country since last 30-years is surviving on domestic and external borrowings then who should be held responsible.

The economic condition suggests that Pakistan’s debt burdened economy is surviving on SBP “Printing of Money” and on Foreign Borrowing. A country that has estimated population of 207.8 million does not require 140 million Cell phone Subscribers. Neither there is much to boast about annual car sale of nearly 220.000 that imports over 50 pct of auto related raw material. Similarly motorbike sale is 2.2 million.

In 2016, Pakistan’s banking sector pocketed net interest income of Rs 428 billion mainly due to large portion of its funds were invested in government paper instead of major lending to corporate sector, which is the major cause of slump in industrial and manufacturing sector. These are few examples. We have to set our priorities.

Bottom line is that the nation is fed up of sermons, flowers economic notes and jargon. Don’t tell the readers that there is plenty of corruption, taxes are evaded, economy is undocumented, cost of doing business is very high, and there is no clarity in government policy etc. Just tell what needs to be done and how much and how quickly nation will be able to pay debt and how much nation can benefit in monetary terms to overcome BOP/CA Deficit problems.

There is only one solution to the problem, tax all income directly and restrict unnecessary imports by imposing 300 to 500 pct duty for next 5-years.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).

The Front runner for next FED Chair

Asad Rizvi
@asadcmka

Donald Trump will soon nominate a head to lead world’s most powerful Central Bank, as Janet Yellen’s term will expire in February.

Last month, Vice Chairman Stanley Fischer in a surprise move announced his resignation that will create another opening next week.

Market will be keenly watching of past ongoing tradition of reappointment of the FED Chair or discontinuation of trend.

The Chair will have a massive task to re-balance FED’s USD 4.5 Trillion balance sheet. In Obama’s tenor FED pumped a little more than $ 4 Trillion in the economy through bond its buying strategy to stimulate ailing US economy.

Here are four names shortlisted by President Donald Trump for FED Chair.      

-Janet Yellen, staunch in her Dovish approach is still a contender because of her experience, market liking and past practice of re-appointment. But again reminder of Trump’s November 2016 statement that he plans to put Republican in role instead could be a negative factor.
During his Presidential campaign Trump was very critical of Janet Yellen acusing her of artificially keeping interest rates low to boost economy.

-Kevin Warsh, stands good chance and I my tilt is towards him as the next FED Chairperson. He was associated with Bernanke and is expected to have good sense about monetary policy. He is known for targeting inflation, but he is not considered aggressive in his stance. Though not an economist, but odds may favor him.His father-in-law is Trump’s longtime friend and well knows personality of the make-up industry Mr. Lauder.

-Gary Cohn’s personal net worth is around $ 260-70 million. In past made some extremely Hawkish statements & is a Dollar Bull. He may struggle to get the nod from Senate because he is personally worth a lot in size that may hinder his appointment.

-Jerome Powell had a meeting with President Donald Trump. He is a Republican and keen supporter of Janet Yellen, he famous for his Dovish approach and could be a good choice for Vice Chairman.

High Policy Rate & Borrowings Disaster for Pak Economy

Asad Rizvi
@asadcmka

The question that bothers me all the time is that can Pakistan Economy keep borrowing forever, which means Permanent Debt? For how long can Pakistan’s Economy survive through the process of money creation, as the economy is stuck in a low growth trap?
It is now more than a decade, to meet its funding shortfall/requirements, government regularly creates Asset by issuing debt instrument (i.e T/bills/Bonds) and receives cash against its distribution.
State Bank of Pakistan cannot keep on printing money forever or else eventually it will burst at a certain point. The economy is already trapped in a vicious cycle of debt due to lack of fiscal and monetary policy role in stabilizing the economic cycle. Therefore, there is desperate need of vision for the longer run.
State Bank of Pakistan cannot act beyond the limits of its given mandate. I would like to highlight three main components of SBP’s Asset. They are Foreign Exchange Reserves, Loans given to Banks and Government Securities (GoP). |
If we take a serious look at the SBP’s Balance Sheet all three is of extremely high relevance.
SBP’s Fx Reserves should be sufficient enough to meet the financial liabilities of economy, unfortunately since over a decade State Bank of Pakistan and the economy is solely dependent on borrowed money due to weak Fiscal and Monetary Policy.
Here is why Pakistan’s economy has been dipping and slowly sinking. Economic slowdown has ruined Pakistan’s financial system. Pakistan’s proportion of Banks Loan to Deposit Ratio (LDR) is too low by international standard, which is very alarming. Regrettably it has never been addressed by economist/analyst or the critics.
In comparison to the global trend, to give you the sense, in GCC area Loan to Deposit Ratio of Qatar is 110 pct, Oman is 104 pct, UAE is 100 pct, Saudi Arabia is 88 pct. In Euro area it is 107 pct, Singapore has hit 100 pct recently, in Thailand it is hovering around 96 pct. Malaysian LDR is around 89 pct, USA is LDR 80 pct, India has been averaging at 78 pct, though demonetization have distorted the number, which is now picking up.
But in Pakistan, it is currently at 52 pct. Loan ratio in 2007 was 75 pct that fell to 58 pct in 2012 and the decline continued till date.
And thirdly, SBP Data of Investments by Banks in GoP shows bank investment in GoP surging by nearly 6 times to Rs 7.188 Trillion which is more than twice of SBP Reserve Requirement.

CONCLUSION 

I have a serious concern about what I have been observing since almost a decade and would like to make an honest and fair comment. 62 pct Investment in GoP by banks against 52 pct advances is meaningless and is the real cause of economic disaster.
Exceptionally large size Government Paper is a dominant asset and its only purpose is to meet the compliance requirements to fulfill donor’s demand at the expense of growth. It is also directly used to control Money Supply as this huge proportion helps to contain Spending and Deficit at the cost of Economic Growth. Several economic indicators available on the SBP webpage give fair hint that over the years and in difficult period SBP has successfully managed liquidity though with much discomfort (Local & Foreign Currency).
To identify the economic crippling factor, let’s take a deeper and serious look at the statistics available on SBP’s web site and the Fiscal Year Financial Estimates. Investment by banks in GoP is Rs 7.188 Trillion against Bank Deposit size of Rs 11.65 Trillion and Bank Loan size of Rs 6.03 Trillion. Debt (External & Domestic) is Rs 24 Trillion. Loan against Foreign Currency Assets USD 3.9 Billion (Forward & Swaps). The size of its regular liquidity injection through its open market operations (OMO) to manage cash flows that also helps its Domestic debt Profile is Rs 1.59 Trillion. External/Domestic Debt (Rs 23 Trillion), Debt Financing Annual (Rs 1.8 Trillion) Trade Deficit (Likely around $ 31 Billion), Inward Remittances (Rs $ 19 Billion Estimate), Currency in Circulation Rs 3.98 Trillion, Ratio of Commercial Bank’s Deposit/Advance 52 pct and Trend of Revenue Collection Target (Rs 4.013 Trillion is likely to miss by 5-8 pct). And can we forget nearly Rs 800 Billion Circular Debt.
If the above data is analyzed carefully, it will give clear sense of urgency in a nutshell, as information provided on the SBP website suggests that though SBP has effectively used its Monetary Tools, but its Policy Tools is getting exhausted. Data Analysis clearly indicates “Severe Liquidity Crunch”, which is caused by excessive borrowings (Domestic & External).
The economic imbalance is a severe problem, which is surely caused by lethargic tax collection policy and pathetic export performance that has been constantly underperforming for last 6-years.
Current growth pattern has been unproductive in terms of country’s desperate economic need that has to be economically beneficial. This is why at current growth pace, problems will multiply and SBP cannot even think of unwinding or reducing the size of its Balance Sheet. Hence, SBP will have to continue with its liquidity injection policy pushing both debt and its financing higher.
In my view, since last couple of years SBP’s higher interest rate policy is not in line with low inflation and is a mismatch as per global norms that have further dented the cash flow position creating financial imbalance.
If we make country wise comparison, in UK inflation is 2.9 pct, Interest Rate is 25 basis point and 10-year bond yield is 1.33 pct. In USA inflation is 1.9 pct, interest rate is 1.25 pct and 10-year bond yield is 2.22 pct. In Germany inflation is 1.8 pct and 10-year bond yield is 0.404 pct. In Spain inflation is 1.6 pct, 10-year bond yield is 1.604 pct. In Italy inflation is 1.2 pct and 10-year bond yield is 2.205 pct. In Japan inflation is minus 0.10, interest rate is 0.40, and 10-years bond yield is 0.031 pct, in India inflation is 3.6 pct, interest rate is 6 pct and 10-year bond yield 6.66 pct. In Pakistan average 2-month inflation is 3.165 pct, SBP Reverse Repo (Ceiling) Rate is 6.25 pct, 10-year bond yield is around 8.15 pct and coupon is offered 8.75 pct.
There is dire need for policy shift, Pakistan’s problem can never be resolved and any growth will be short lived unless banking sectors Advance/Deposit ratio realistically enters in a 65-70 pct range band.
I hope better sense will prevail and our monetary policy committee will realize the cost nation is paying, as high policy rate and bond coupon is the real culprit, which is hurting the nation or else in by (2023) country’s debt will be close to Rs 35 Trillion and annual interest payment Rs 2.8 to 3 Trillion.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).

The Death of Bitcoin !

Asad Rizvi
@asadcmka

 

Jamie Dimon is right about Bitcoin, reminding investors about 17th century Dutch Tulip Bulb crash that was brought from Turkey in 1593 by botanist Charles for research work. From 1630 onwards, Bulb prices rose steadily and its value reached nearly 10 times than the ordinary Dutch workers salary or few Bulbs were worth a value of a house. But in 1637, as supply flow increased and when sellers decided to offload its holdings, prices crashed within no time.
Bitcoin that was created on October 2008 was released in January 2009. Unlike Banknote or Coin, there is no physical existence of the Crypto-Currency that can neither be deposited in a home locker, drawer or kept under pillow. It is Digital Cash or Online/Virtual Currency that only exists on Computers.
The truth is that Crypto-Currency is only a “Dream or Abstract Currency” and Buyer’s emotions are attached with it. But in reality if try we go into the details presently there is no logical sense about this product.
If we look at some of the statistics, daily Fx Trading Volume is UD 5.3 Trillion and the total size of Derivatives, which is off balance product, it is 6-7 times more than the total size of global economy ($ 75 Trillion) of which nearly 80 pct is documented and 20 pct is shadow economy.

Both the above figures are documented and regulated and are officially reported and hence. This is why it can easily be monitored as per SOP and per operational policy manual that can be accessed by the regulators/financial institutions, tax authorities for internal control or for audit purpose. Hence, it becomes easier to evaluate the credit risk involved.

While in comparison, size wise Market Capitalization of Crypto-Currency is tiny USD 137 billion or approximately 0.0025 pct of the above data. Digital Currency is not protected, as it is not backed by financial regulators or the Central Banks, hence risk involved is huge and unimaginable.

It lacks support from major exchanges and is not backed by financial system. For e.g., data of Bitcoin, which is the most popular crypto-currency is totally dependent on block-chain, which is basically a digital based ledger. This is why there are extreme security risk/issues. It can also be easily hacked.

Therefore, any such type of financial investment instrument without Central Bank or Financial Regulators backing is worthless due to financial risks involved that always poses high risk of collapse.

History of Tulip Bulb suggests that in the absence of backup support from Central Banks and Financial Regulators, it took almost 10-years for active trading activity before collapse occurred.

Similarly, the rising trend of Bitcoin price from $ 0.8 per Bitcoin on July 2008 to current level of $ 3978 for one Bitcoin is based on similar pattern that was witnessed in 17th century Tulip collapse.

While, BIS, which is considered Central Bank’s Central Bank in one of its recent report has shown its grave concern calling Central Banks to take the matter seriously. Fearing volatility, it is recommending Central Bank’s to consider issuing its own Digital Currencies.

The cause of alarm bell raised by BIS is obvious because apart from Bitcoin, which is most the popular Digital Currency, during this decade well over one thousand of crypto-currencies have emerged.

Looking at the market size of crypto-currency, it is still tiny in size. One of the Cambridge University research suggest that across the world there are 3 million Crypto-Currency users.

The current pace of volatility and regular mushroom growth of crypto-currency in the absence of financial regulator, the ongoing trend is alarming, though many investors would think that Bitcoin is still by far the most promising virtual currency.

In most recent development to protect customer’s asset some of the major economies have shown serious concern about virtual currencies. Regulators are getting serious, as China, UK, Hong Kong and South Korea.

Last week, China took some serious steps and is likely to block the network connection. Some of the reports are suggesting recent bounce back of Bitcoin is caused by one month grace period given to prepare for closure of exchanges trading platform that should be closed by end of October.

Investors should rethink about their investments strategy in Crypto-currencies, as in recent times, oil is best example. News of small oil glut often causes sharp drop in prices, which means if any of the smart miner of crypto-currency decides to take advantage of and flood the market with Digital Currency, the collapse can occur.

Let better sense prevail. Cost to mine gold roughly ranges between $ 800-1.000 per ounce and after unwinding of quantitative easing, gold do not have the legs to surge on market demand, it only surges on extremely bad news and struggles in $ 1350-00 range before exhausting.

Therefore, Bitcoin at $ 3978 is unimaginable. Digital currency investors should seriously rethink about their strategy, as unwinding could be better bet and more sensible approach rather than waiting for accident to happen.

 

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).

Habib Bank Money Laundering – Biased Approach !

Asad Rizvi
@asadcmka

Last week New York State Department of Financial Service (DFS) banking regulators that were seeking USD 630 Million penalties for compliance failure reached an agreement with Habib Bank to settle illicit money transfer issue at USD 225 Million fine.

It seems that the reduction in HBL fine is the outcome of conditional agreement to close its US Operations, which if true is unfair on part of regulators.

Sole purpose of money laundering is to hide funds or assets from the state or the intention is to somehow legalize the funding received from unlawful source or illicit activity. In money laundering activity initially funding is obtained directly, though transaction wise it may vary from each other. But money laundering always involves proceeds of illegal activity.

Terrorist financing has another dimension, as the purpose is to utilize money for illegal political activity. In this case funding may not necessarily be obtained only by illegal means or illicit proceed. Funding sources can carry legitimate tag possibly via charitable donations or through foreign government’s sponsorship plan.

Money laundering and terrorist financing are financial crimes that have severe and adverse economic impact, as both eventually is misused for wrong purpose and is not part of documented economy that has many risks involved.

As per report presented to European Parliament, estimated annual worldwide loss caused by money laundering ranges between USD 1.5 Trillion to USD 2.8 Trillion.

Unfortunately, due to the size of transactions Banks/Financial Institutions always gets involved directly or indirectly as third party in the financial crime as victim. There is rise in trade based money laundering through fake import and export invoices. Transfer of money through shell companies without any economic activity in another popular way to shift large size funds.

To fight financial crime, strong and standardized anti-money laundering strategy/program is required to reduce the risk of all types of misdeeds, as Bank transactions still play dominant role for laundering.

To comply with anti-money laundering rules that include expense on staff and systems, it is estimated that cost wise US institutions alone spends nearly USD 8 Billion annually. One of the reports suggests that reporting of suspicious activity in USA has jumped from 663.000 in 2013 to nearly One Million in 2016.

However, though risk remains high, US Federal Regulator Data suggest improving trend in terms of fines imposed. In 2016 office of the Comptroller of the Currency AML related 41 actions taken, which is lowest since 2011 according to available Association of Certified Anti-Money Laundering Specialist (ACAMS) data. 9-penalties were carried out against 23cases in 2015 versus 47 cases. To give you a sense of others, UK Financial Conduct Authority and Gambling Commission penalized 5 AML related enforcement action in 2016. And in April same year Canada’s Fintrac issued penalty for the first time against unknown large size bank.

In another key survey report, in USA, findings suggest banker’s ethical behavior has become questionable as their illegal or unethical behavior has doubled since 2012. The reports says that nearly 35 pct of those earning USD Half a Million plus annually are witness to all the wrong doings at their place of work and their institutions fully support and protect them. Interestingly the survey made specific mention of bonuses and remunerations blaming it for paving way for a force compromise on ethics and law.

In 2013, President of FED New York said there is evidence of problems involving some of the large financial institutions relating to law, regulation and public trust and further added that there is deep evidence of deep seated cultural and ethical failure.

Senator Berne Sanders famous for making anti bank statements is on record having said that the business model of Wall Street is fraud, which according to him. “Business Model” is a plan for making money. About financial institutions he says that 6 of them hold about 60 pct of assets, they holds over 40 of bank deposits and their engagement in mortgage business is 35 pct, issues 65 pct of all credit cards.

Most recent case of anti-money laundering and breach of law in violation of terror financing law engulfing Commonwealth Bank of Australia has further exposed cult of leadership, as its highly paid CEO ignored violation on more than 53,000 occasions. The bank failed to notify regulators of large cash transaction blaming coding error and wants regulator to believe that it was just a mishap. This is ridiculous.

It is a common claim that top executives are paid exorbitantly high salaries plus performance bonuses, as a reward for their extraordinary talent.

I am not sure about their hidden talent and if they deserve all that money, but after looking at the records in percentage terms, I can safely say that the engineers are more result oriented than the bankers, as planes do not crash very often like financial market crash, buildings and bridges do not fall regularly and roads are not always washed away, but sadly financial crash happens most frequently that linger on for decades and all the mending is done by applying financial engineering tools.

This is why to manage global financial crisis/irregularities complex financial instruments “Options was introduced in 1973 to overcome disaster that helped in blossoming global financial industry.

With the passage of time, cracks once gain started to appear in financial market, as the Global economy grew to unprecedented due to creation of new debt. But where did all the money disappear? All the good money was sucked by so called financial market gurus/experts and major chunk went into the shareholders pocket.

Then again in 1994, Credit Derivatives, Off-Balance Sheet Product, brainchild of then Chase Manhattan Bank now JP Morgan came to the rescue of world financial market. This notorious product is not part of asset and debt, hence it does not appear in financial institutions or corporations balance sheet.

Estimates suggest that the massive growth helped the size of Derivatives to reach close to USD One Quadrillion ($1.000 Trillion), which is now estimated to be half the size. Keep in mind the total size of Global economy is USD 74 Billion (Current).

Risk Management & Control Framework

Primary objective of Risk Management is to ensure Banks financial stability in medium to long term and to have operational flexibility so that it can make quick adjustments as and when required to meet its mandate.

Customer due diligence is the key to the beginning of any transaction that demands customer information including nature of business. Verification of information is necessary that is being provided by the customer when opening an account and Technology and Software plays vital role in identifying the genuineness of a customer.

Then comes matters of internal policies, procedure and banks reporting structure (internal and Central Bank), as bank are required to adopt a risk based approach, because weak AML controls have reputational repercussions.

By seeking such information from its customer, it helps to ensure that AML controls are placed according to the required standard that helps in minimizing or from preventing the financial system from being used for money laundering or for terror financing purpose.

This is why strong governance is demanded for better operational procedures, policies, limits and checks. It helps to manage risk and control policies, which is based on best international banking practice.

Conclusion

In mid-July 2012, US Senate released a 335 page investigation report on HSBC’s ties with Al Rajhi Bank with laundry list of offenses. Al Rajhi’s link to terrorism were conformed in 2002 by US agents.

In 2005, HSBC was linked to encashment of USD 130.000 worth of traveler’s cheques and its compliance team asked for discontinuation of all business, but by end of 2006 the relation was reinstated. And finally in December 2012 HSBC was charged and it announced that it had agreed to USD 1.92 Billion settlement with authorities. HSBC has learnt a good lesson and is now very choosy about its customer/business.

In March this year it was reported that some of the biggest global banks were engaged in processing millions of Dollars from Russian money laundering schemes.

Leaked report disclosed names of some of the Major Banks involved. They are Wells Frago, JP Morgan, Barclays and few others.

Bank of America, JP Morgan and Western Union were allegedly involved in drug trade in 2014.

In 2013, Royal Bank of Scotland was fined by mere USD 100 Million for concealing 3.500 transactions that involved transfer through New York Banks.

I would like to highlight that after George Osborne’s warning in his letter to Ben Bernanke and Timothy Geithner not to pursue criminal charges against HSBC as prosecuting could lead to global financial disaster helped the bank to escape charges.

In comparison to the nature or type of offence and penalties imposed on others based on the size of bank, regulators approach towards Habib Bank (HBL) is biased and sheer hypocrisy.

And if the argument is that others too have been penalized, then HBL never cheated nor the Pakistani bank was involved in any wrong doings, it was certainly not intentional. The bank may have misjudged or misread the seriousness

A fine of USD 225 million based on size of the bank is injustice. Fine imposed on HSBC is bank’s 3-4 weeks profit. Fine imposed on RBS are equivalent 2-times of banks current annual Bonus. In 2010 bank’s bonus pool was 8-time of the penalty imposed on Habib Bank. Whereas for Habib Bank a fine of USD 225 million is 70 pct of banks consolidated profit in 2016. I protest ! This is unfair ! What a shame !

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).

Economic Impact of US Vs North Korea Tussle

Asad Rizvi
@asadcmka

Though I still do not see imminent threat of war, as likelihood of conflict is low, but for the sake of discussion, it is extremely tough to analyze or calculate the consequences of war between USA and North Korea.

On this issue I do not believe in any sort on conspiracy theory, but the timing perfectly suits Donald Trump to ease domestic political pressure to a certain extent as North Korean aggression and Hurricane Harvey must have provided him much needed relief to ease off the pressure.

One should not forget the importance of current month, as law makers must act to avert collapse as they are suppose to raise the ceiling by September 29 deadline.

A brief history suggest that in WW 2 Japan lost unified Korea to Allies, US taking control of South and Soviets making inroads towards North and failure to elect democratic government due to radically different political ideology.

Then Korean War broke out forcing USA to repel Russian backed North attack, Russia backed off, but China chipped in to support North Korea to South back. Finally, ceasefire took place, but the two Koreans were never in serious negotiating terms. However, impact of any type of conflict direct or indirect between USA and North Korea either Nuclear or Conventional will be disastrous.

If we talk of potential economic impact that could be caused by conflict, keeping in view the recent dispute in the Middle Eastern surroundings, which is most devastating since World War 2 in terms of loss of life and economic destruction, any conflict, is likely to drag South Korea that has a GDP size of $ 1.45 Trillion. China too has an important role to play. Combining all four economies it all totals to around 45 pct of the total size of $ 74 Billion Global economy.

Hint of clash or attack will certainty risk disruption of global supply chain that will have contagious on all trading partners. Any type of military conflict depending on the nature of conflict will have adverse impact on respective economies.

The risk is that if the conflict escalates, distance from North Korea to Seoul is 25 miles and mainland Japan is 320 miles. Hence, even mild tension will initially see sharp surge in commercial shipping rates, crude oil import and LNG supply will be disrupted. Supply of Iron Ore, Steel and other commodities such as coal, wheat etc will hit Australian market badly.

This is why North Asia and Korean Peninsula is very sensitive to commodity market and is a one of the major factors that recently market is witnessing sharp hike in global commodity prices.

Conclusion

I am looking at two possibilities. Firstly I do not expect escalation of war, which does not suit both the sides and the world. Hence, I will not be surprised if at the end of the day this exercise proves to be a hoax.

I am firm in my view that war is unlikely to happen, unless out of sheer frustration USA is forced to attack North Korea because of its unacceptable behavior or if at any moment North Korea decides to launch first strike, which is extremely low probability.

USA may shout for global unity when UN Security Council meets on Monday. It may ask China and Russia to slash its oil exports to North Korea and other to halt trade. Beijing has already said that calling for trade boycott against North Korea is unfair. And what about US sanctions imposed on Russia ? This could be double whammy for USA.

However, war is not affordable for USA in economic terms nor can it unnecessarily afford to drag China in its conflict, as China is never a party of this conflict. China is not Pakistan, Iraq, Libya or Syria.

It is worth nothing that trade volume between USA and China in 2016 was $ 580 Billion and US Trade Deficit was USD 347 Billion. Similarly South Korea’s Import from China was $ 90 against $ 137 Billion Exports and against USA its Import bill was $ 44Billion versus $ 70 Billion Exports.

So Economically USA has the highest stakes in the region. It can neither afford adventurism nor can it dictate its trading terms with China because its economy is heavily dependent on China.

USA has a huge Debt ongoing problem (USD $ 19.9 Trillion), which cannot be resolved unless spending are slashed and income is raised and it may take several decades to manage. American economy is highly dependent on Chinese money because of China’s astute policy it has engaged USA in vendor finance, providing the money that helps finance the huge US fiscal and trade deficits, allowing Americans to buy more goods than they sell.

Hence, USA cannot block or slow its trade with China. USA is trapped as its Treasury Holdings is USD 1.146 Trillion.

But war looming war condition is a huge risk for US Bond market. I am surprised to see US Bond yield making gains on US/Korea conflict news. I am wondering if USA adds pressure on China or in case of conflict why and how Chinese will purchase US Bonds. Instead other highly rated bond should be in demand, which is the expected move as the issue continues to linger on. If US/Korea situation worsens 10-year bond yield could surge towards 4 pct.

This is why gold and commodity market is surging, while oil will remain depressed due to imbalance caused by excess supply and closure of oil refineries. Oil production is like milking a cow that have to be milked.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

Trump – Reminder from Pakistan to your Billion $ Claim

@asadcmka
Asad Rizvi

In my September 25, 2016 note, I had fully supported Trump as I had a reason to believe that that Trump will win US Election and will immensely contribute towards USD 18.5 Trillion ailing US economy and to the world.

If we look at the America’s 20-year Economic tale, there is nothing very exciting to talk about. Instead Dot-com bubble led to stock market crash in March 2000, which was followed by the US housing market crash in 2007-8 that blew up the global economy.

In my view USA that remained world’s largest economy for nearly 140 years is struggling very hard and is getting stiff competition from China to retain top position. Economic data suggest that China has clearly displaced the Americans in manufacturing and industrial sector. Hence, I would not hesitate to say that America’s prosperity has declined.

My faith in Trump is because of his business acumen. He is being carrying a powerful slogan for his country man “Make America Great Again” that meant he wants to protect America’s National interest.

But the major factor that impressed me about Trump was his balanced remarks about Pakistan. Prior to US Elections he said Pakistan is a Semi-Stable Country and he wants good relationship, which I took positively and seriously hoping that things may get better in Pakistan’s favor, as Pakistan has immensely suffered due to weak foreign policy.

Another cause was my anger against Hilary Clinton. During US Elections, India was her ardent supporter, as she play crucial role to bring India closer to USA. Hilary paved way for her husband “Clinton” after becoming Senator that brought USA closer to India to such an extent that even her closest Foreign Policy folks developed soft corner for India, which was the damaging factor for Pakistan that ultimately helped India in finalizing the “Nuclear Deal”.

However, Tuesday’s sudden change in Trump’s stance threatening to opt for hardliners approach towards Pakistan, blaming for having close ties with terrorists and demanding tougher measures against them and or else hinting sanction does not bode well for a country that since last 4-decades has giving sacrifices of unimaginable magnitude.

On Monday/Tuesday, Trump has talked tough on Pakistan, referring to USD 33 Billion assistance since 2002, which includes nearly USD 14 Billion Collation Support Funds (CSF).

Let’s do the number counting from 1979 Afghan war onwards. Pakistan is being suffering the brunt of Afghan war that it had entered after the Soviet invasion, which probably was also in Pakistan’s interest to safe guard its sovereignty.

Support from USA, Saudi Arabia, UAE, China and many others too were in their best interest for obvious reasons.

Unfortunately, soon after withdrawal of Soviet troops, west withdrew their support and Pakistan was left stranded. During that period US monetary assistance was of around USD 7.5 Billion.

While, estimated cost/spending of hosting Afghan refugee in last 38 years that included shelter and accommodation. Health and education was also part of their basic need, so the cost has exceeded USD 200 Billion.

Since 2002, it is reported that 3.8 Million Afghan refugees have returned back to their homeland. Pakistan is still entertaining around 3 Million registered and un-registered refugees without much needed foreign financial support.

Pakistan’s economy is still in shambles because of inherited Afghanistan problems, whereas the country was forcefully dragged into another unjustified conflict after the unfortunate 9/11 happening that added salt to the injury.

Causes of Domestic Unrest & Economic Disaster

Despite 9 years of Afghan occupation, Soviets suffered massive defeat. They decided to leave Afghanistan in 1988 pushing nearly 7 million Afghanis inside Pakistani territory.

The Afghan war doomed Pakistan’s $ 50 Billion economy due to numerous unfavorable factors and the country was left alone to face bleak economic prospects.

After 9/11 Pakistan was once again pushed into a conflict that it did not own because Pakistan was never behind the attack.

Hence, West has to realize the difference between conflict of “1980’s” and “War on Terror”. Both are of entirely different nature.

In earlier war the alliance of trio was supporting Mujahideen, today Pakistan despite not being involved in 9/11 attack is bearing the brunt and paying unnecessary price in shape of horrific domestic terrorism costing several thousand human lives.

Therefore, blaming Pakistan that it is a safe haven for insurgency and it is playing double game is sheer nonsense. It’s high time to seriously consider revising the flawed policy towards Pakistan.

Back in November 2008, while hosting my Live Tv talk Business Show on AAJ Tv, which is available on Tv Channel’s archive, I was the first Pakistani to offer formula that Pakistan should charge fee to its collation partners “War on Terror” for using its territory, which should be based on factors impacting our GDP growth.

I recommend that since we have a democratic elected government bill should be move in National Assembly to obtain approval that should have helped to discuss the issue seriously with the collation partners. Then my estimated fee cost was USD 40 Billion.

Surprisingly in next 14-days Hussain Haqani Pakistan’s Ambassador in USA floated same idea with same amount that appeared as top story in “Daily Dawn”. From that day onwards until now everyone is floating same idea without providing any logical argument.

In Comparison Pakistan’s Role “War on Terror”

On Monday/Tuesday, Donald Trump gave stern warning to Pakistan hinting change in America’s stance. He said USA has been paying Billion and Billions of US Dollar, but Pakistan is harboring terrorist.

Here is a Pakistani perspective based on economic terms and estimated loss of precious human lives.

Firstly, I support Trump’s claim that Germany owes USA vast sum of money and according to him it must be paid for the powerful and very expensive defence it provides to Germany.

For decades Pakistan is also faced with similar or rather more adverse situation, as it did not get fair share in terms of financial support. To support my argument 80 pct of the NATO supply goes through Pakistan, but instead Pakistan has always been a backbencher and has been paying from its own pocket at the cost of its economy. Pakistan’s trading data will suggest that NATO and its allies have been very selfish and lest supportive.

Now let’s see how India, which considers itself champion of all trades can excel and leave behind Pakistan, as Trump has asked India for its help in Afghanistan. Trump’s demand from India is purely conditional based on business relationship, as he said India makes billions of Dollars in trade from USA. India with USD 24 Billion deficit certainly enjoys bigger share of trading pie.

Recently USA has been very kind to India. They had a friendly defence pact. India was given waver on its 34-year ban on nuclear deal and lately USA allowed F-16’s to be produced with made in India deal.

My only concern is that despite Pakistan siding with the West for decades in a very extraordinary manner at the cost of its human capital and infrastructure issues is now totally dependent/surviving on the influx of external funding. Although demographics in our surrounding has completely changed, but the country is faced with sever unaddressed social welfare problem because of its commitment.

Therefore, it is absolutely wrong and unacceptable to blame Pakistan unless its concern are recognized and properly addressed. It is true that despite tremendous domestic pressure on Pakistan due to social issues, its role is commendable. But it did not get the recognition and nor compensated from its so called global partners for paying a very heavy price.

My Perspective Cost to Pakistan “War on Terror”

Recently Pakistan’s Central Bank in its report has said “War on Terror” has cost Pakistan USD 118 Billion. I have my reservation about their number because as per calculation economic loss is much larger and here is my detailed reasoning.

Afghan Refugee – In 2001 Pakistan was catering nearly 6 Million Afghan refugees, which now rough down to 3 million including unregistered number. Based on $ 2 per day on average annual expense is $ 4.5 Billion times 16 years is $ 72 Billion.

Tourism & Service– Pakistan’s tourism sector was destroyed after the Afghan war that started to decline. Based on size of Global Travel, Tourism and Revenue data it is currently USD 7.7 Trillion and USD 1.25 Trillion. Its contribution in global growth is above 10 pct of the GDP.

During all these years growth in Asia has been in many folds, especially after 9/11, as international arrival in the region has reached 279 million from 110 million in 2000.

Pakistan badly missed out the opportunity due to domestic unrest mainly caused by War on Terror. Muslim tourist that had opted not to visit Europe and USA would have traveled to Pakistan, which means annual opportunity tourism cost based on an average growth would have been $ 3 billion or nearly USD 48 Billion. Tourism industry was have added $ 2 growth in service industry, this amounts to $ 32 billion.

-Transportation infrastructure, Roads & Bridges – There is lot of talk about US assistance to Pakistan in the name of Collation Support Fund, which is basically reimbursement for expenses already incurred and for the facilities provided.

This is some kind of joke and sheer weakness on part of administration because since decades Pakistan is already faced with economic problem and manages its funding through external borrowings.

Therefore it is sin and mockery to the ailing nation when Pentagon it will not release (CSF), money which is already spent.

But it is extremely expensive proposition for the exchequer because when roads are used for NATO supplies to transfer goods from Karachi to Afghanistan if frequently gets destroyed and have cost more than collation funds received. Spending amount for damage caused and to repair roads and suffering of business cannot be easily calculated. But based on current pricing of roads getting laid out and carpeted in Punjab and KP, fresh cost must be well above USD 100 Billion.

Industrial & Manufacturing Sector – During all these years Nuisance of “War on Terror” has caused severe and adverse impact on the future growth prospects. The size of economy should have doubled by now to USD 600 billion instead of current USD 304 billion, which was $ 78 billion in 2001.

During this period Pakistan missed out tremendous growth opportunity and hence, GDP growth was deprived of nearly 2 pct to 2 ½ pct that has incurred an estimated loss USD 150 Billion.

Conclusion – Pakis has roughly received a total of combine Economic assistance though USAID, Military Assistance and Collation Support Fund (CSF) of roughly USD 47 billion from 2001 until June 2017.

While our younger generation of 100 million could not get proper education, they were unable to get jobs due to Economic slowdown resulting social unrest in the country.

Therefore, in 16-years period based on my above calculation if I add up all spending of USD 72 Billion on Afghani Refugee, Tourism $ 40 Billion, Service Industry $ 32 Billion, Transportation infrastructure, Roads & Bridges $ 100 Billion and Industrial & Manufacturing Sector $ 150 billion. The total cost to fight “War on Terror” is $ 394 billion against $ 47 billion receivable.

Mr President I am sending you the unsettled bill for $ 347 Billion. Please consider this as a polite reminder for payment, which is long overdue. You are kindly requested to arrange the payment at earliest, so that the people of Pakistan can take sigh of relief on the economic front and you can try your luck with India.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

What Next for Economy & Pakistan Stock Market ?

@asadcmka
Asad Rizvi

In my January 01 “Outlook 2017” while Pakistan’s stock market was trading at 47,806, I gave a trading range of 42.000-53.000 for the year. Again on May 27 in my “Budget Perspective” write-up I clearly said that market will hit the top 53,000, but I am not ruling out large correction and in my July 6 note, “Economic Outlook, July-December 2017” I said target 42.000 is intact.

What I fear is that 42,000 levels may not be the bottom for the calendar year and I do not rule out more damage if 40,020 levels fail to hold.

As the nation is approaching elections, at this very crucial moment political and economic instability has added insult to the injury, as bad situation has further worsened and hence, our wreaked economy is getting very little space to make amends.

Economic data released recently suggest that cracks have started to appear, as the economy is experiencing complications. The truth is that in the present ongoing domestic conflict and changes in the cabinet by shuffling of portfolio, fixing of economy has becomes a very daunting task. Plunging FX Reserves is a cause of big concern especially after the maturity of short term foreign borrowings, as more is in pipeline could inflict more damage unless checked.

Interestingly, despite so much of hue and cry, employment to population ratio is encouraging. If we look at the balance sheets of corporate sector, it will not reflect poor health or low profitability. They are earning more as a percentage of economy than ever before.

The basic concept is that the health of any economy is largely dependent on customer’s response (Domestic & External). But uniqueness about Pakistan towards economy is that its approach is complacent and insensible, as we are do not realize the consequences of rapacious borrowing without having any payment strategy.

On Macro level, as exports is not responding due to weak/obsolete policies and with remittances getting exhausted due to worsening economic condition in oil producing countries the risk to economy is enormous. Pakistan has a history of textile related growth, which is thing of past because it failed to make technological advancement to maintain pace.

While, imports is causing more damage, which is growing at a very alarming pace despite softer oil bill in last 34-months. Unfortunately import of luxury items is the actual culprit that caters good size of ill gotten money, which is adding pressure on foreign exchange reserves.

While, exports are on constant downward trend since last few years, the factual cause of economy uptick in recent times was/is due to foreign exchange lending to Pakistan. Availability of foreign exchange liquidity through external borrowings pushed FX Reserves to new highs, which is required by the rating agencies to lift country’s credit ratings.

Revenue collection data and its small taxpaying base will provide better clue about Pakistan’s inflated economic growth, as growth in industrial and manufacturing sector is pathetic and requires sever structural reforms or current type of growth will remain inconclusive.

Based on proportion, growth in agriculture sector is below average. But growth in construction will depict that it was CPEC that has enormous future potential and consumer related growth had helped the economy to attain higher number.

However, changes in cabinet portfolio and deteriorating economic data do not bode well. If care is taken in agriculture sector and as per budget Rs 1 Trillion is injected then due to rising global commodity prices exports in this sector can grow by $ 1 to $ 2 Billion.

30 pct outstanding foreign debt may look small in size, but its servicing or payment at maturity is worrisome. Circular Debt of Rs 800 plus is now hefty in size. This FY year I am expecting Remittance to dip by roughly 3 pct.

Because of coming elections Pakistan has a tough choice. I am expecting exports to range around $ 22-23 Billion and with higher energy production and cotton production below 13 million bales may push import bill towards $ 58-60. Fx Reserves will remain under pressure. It all points towards easing of Rupee, unless Pakistan is able to pull off an economic miracle. It all suggests that credit rating agencies may not adopt friendly approach towards Pakistan and hence economy could come under pressure.

In such a situation key for sustainability will be Bank Credit of Rs 1 Trillion each to Private Sector and Agriculture Sector. Slash in Policy Rate and PIB Coupon Rate along with Lowering of SBP Repo Rate (Floor to the Corridor) and Stable Rupee.

However, Stock Market is likely to take further bashing, as foreign outflow of USD 424 million is not the end. Banks and financial institutions, which is the major market player, will refrain from entering the market with vigor due to sever risk factor. Hence, 40.020 is the next key level to watch for further guidance. On the upside break of 47.200 will encourage for bigger up move.

 

 

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

After Elections Pakistan Will Be Seeking IMF Help

@asadcmka
Asad Rizvi

It is a daunting task to assess the economic impact after ousting of Nawaz Sharif by the Supreme Court of Pakistan, as the stakes are higher and options are limited. Leave aside CPEC, as I believe that it has nothing to do with ongoing politics. In such a situation the country cannot afford filtering out of more bad economic news.

Though at Fiscal Year end (June 2017) the size of economy grew to USD 302 Billion and attained 5. 3pct growth, but some of the closing economic data that were released indicates that in number terms the economy got mildly exposed due to adjustments, as the country is still committed to meet certain target levels set by IMF under EFF 2013-16 supported programs.

If we take a look at the overall pattern of 15-years old trend of Mounting Debt and Deficit Financing, it reveals that Liquidity Management (Domestic & External) is the mother of all problems faced by the economy due to lack of growth initiative in industrial and manufacturing sector.

More recently another “Opportunity Cost” of nearly USD 20-22 Billion of oil savings was spilled over after late 3rd QTR 2014 oil collapse, but our economy was unable to economize resources that was spent mindlessly and is wasted.

This may be debatable, but as the country is approaching national elections, I strongly believe that Ishaq Dar is the key man for the ruling party to handle all matters pertaining to our troubled economy. His absence can make huge impact, as he is the master of making amends.

Minus Pakistan’s Total Trade, if we take a look at Management of Circular Debt, FX Reserves Management, Currency Stability, Domestic/External Debt, Size of Government Securities, and Debt Servicing that almost covers the overall economy. His absence will increase the volatility risk, which is bound to cause economic turbulence.

Policy Rate/Exchange is another key economic factor that will play major role in determining the fate of future economic trend. Unlike our Hawkish Policy Stance, which has a pro-inflation tilt, BOJ, FED, ECB and BOE are no goofs that they are holding rates well below 2 pct since over a decade. It is because they are well aware of the consequences of high funding cost.

Despite stubbornly below-target inflation rate our economy is paying high price due to expensive Domestic Borrowings caused by High Policy Rate and hence, is selling expensive Government Bonds. It is mind-boggling that why our economic managers instead of curtailing borrowing cost is paying such a high price, which is caused by Revenue shortfall (since 3-decades).

Similarly, the economy is paying high cost to service its external debt due to falling trend in exports since last 7-years and mild dip in remittances resulting widening of current account deficit

Disputing that depreciation of Rupee will push exports higher and curtail Import is a mere joke. Import of annual oil bill is almost half the size of oil bill that was 3-years ago, which roughly averages around USD 7-8 Billion.

Therefore, unless we stop buying stuff minus CPEC related machinery and energy equipment’s, curtailing of current account Deficit is a wishful thinking.

Election Year Risk & IMF

The writing is on the wall, next government will soon have to approach IMF for help. Politically this could be most hated proposition, but despite last two outings, since 2009 the economy failed to respond to achieve desired result. Hence the economy is unlikely to breath with comfort without foreign funding assistance to fill maturity gaps that also has many strings attached.

The problem with IMF loan is that it does not have “Social and Economic Well-being Target”, neither it helps to stimulate growth, as only tiny amount is allowed for spending purpose to settle debt related payments.

IMF loan has not helped to reduce domestic social unrest. Sheer purpose of reckless borrowings is to show support to weak balance of payment position and to allow showing of fat FX Reserve position, which also causes economic stress.

To give a perspective, the impact of IMF loan taken during Musharrf’s era ended successfully. But in his later days, it was his weak economic policy that had costed him the elections.

Prior to 2008 elections his economic policies of previous two years got Musharraf burst due to Depreciation of Rupee, while, FX Reserves fell by nearly USD 12 Billion to USD 4.68 Billion, which was good enough for 2-months import. Policy Discount Rate was raised to double digit. Petrol prices were raised by more than 20 pct that added pressure on electricity rates, hence, transportation charges were hiked in same proportion that added pressure on essential food items.

Similarly, declining economic condition during PPP’s 5-years rule added pressure in 2013 election, as Rupee during that period was depreciated by nearly 55 pct that had sharply pushed Total Debt higher. Debt Servicing cost skyrocketed and Private Sector Lending was clogged, as in January 2011 the government was responsible to Hike Policy Discount Rate to 14 pct.

But the deteriorating economic condition during Musharraf’s tenure was possibly due to impact of rising oil prices that kept on climbing from 2003 to 2008 by more than 300 pct i.e., from USD 28 per barrel to peak in July 2008 to USD 145.85 per barrel resulting sharp fall in Pakistan’s FX Reserves.

While, PPP government though eased Policy Discount Rate to 10 pct before elections, it did not realize that it was getting cornered due to extremely rigid IMF lending conditions as they demanded tougher austerity measures that did not help to provide clean lending to Private Sector as it was simultaneously asking to contain deficit, so banks are encouraged to invest in government paper.

Unfortunately during that period due to lack the economy could not benefit from average 140 pct rise in Global Commodity prices and neither the economy could gain from 20-25 pct fall in oil prices.

Conclusion : Challenges & Opportunity

Meanwhile, present government did manage to meet donors (IMF) demand by almost attaining the required numbers. But the large part of country’s population is deprived from economic gains. The price paid to meet donors target is very high, as Foreign Currency loans acquired have surpassed USD 27 Billion.

At its current pace we estimate that by the end of FY 2018, combined Domestic and External Debt is likely to end up around Rs 24 Trillion, while annual Debt Servicing could reach Rs 1.7 Trillion and further Rupee Depreciation will add to the annual financing cost.

The point is that the Rural Voters are least bothered about higher GDP Growth, Low Inflation Rate, high number of Car Sale, boom in Energy Sector or heavy demand for Cement.

Nor they are keen about S & P, Moody’s or Bloomberg forecast. All they want is easing of Petrol & Electricity rates, cheaper transportation cost or affordable essential items of daily use such as Wheat/Bread, Rice, Ghee, Sugar, Lentils and Vegetables.

As election is approaching government is presently faced with a formidable task to manage economy, which looks brittle. Therefore, for the present government the challenge until coming elections is immense, which is required to make calculated moves to keep its core voters intact or else any type of erratic or complacent approach could easily backfire.

However, lessons can be learnt from past trend, as government’s present stance suggest that it is well aware of the heavy price it may have to pay in coming elections if it tries to bring aggressive economic changes. They look determined and are unlikely to bring major policy shift.

Instead, there is a good possibility of friendlier economic approach, as National Budget is due only after 2018 elections. This means they will opt for stable Pak Rupee, cheaper Petrol prices and possibly further easing of electricity rates. Exports are likely to do better than last fiscal year. Focus could be on increasing direct Tax Collection, which will not hurt the Rural Voters.

However, Rating Agencies and Banks will largely focus on all types of risk factors. Fiscal slippages too will be keenly watched, which means all eyes will be on Balance of Payment.

If government is unable to Rollover/arrange funds and FX Reserves continue to decline, I will not be surprised to see a friendly country hoping in to assist the present government with short term funding offer.

Credit Default Swap (CDS) is another key benchmark to monitor country risk, which are currently priced 306 for 5-years. Higher number indicates increase in risk, lower is good.

In all probability, political uncertainty will witness slowdown in stock market trading volumes, as exuberance of foreigners will thin down due to changing political environment.

While, Banking and Financial sector, which is the major market players/mover will take calculated risk, which means less aggression on their part.

Therefore, instead of one sided uptrend, profit taking at quicker pace will be often seen. Hence, choppy market condition to prevail until elections.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

How To Decide Fair Value Exchange Rate?

@asadcmka
Asad Rizvi

There has been a great deal of discussion/debate over the past week about the fair value of Pak Rupee after sharp deterioration of Pak Rupee/Dollar exchange rate in the inter-banks market on July 5 2017.

It all started in the early hours of Wednesday morning after a large local bank kept on purchasing US Dollars in sizable lots by our standard from the inter-bank market, which saw break of crucial level 104-90-00.

In the absence of SBP, which is a normal ongoing market practice for years, I/B market got panic, as sellers were hoping that Central Bank would step in as per daily practice. But matters worsened as hopes of SBP intervention faded, prices got wide, as sellers of USD rushed to cover their short positions.

While, the inquiry is going on I don’t want to jump into a conclusion. But on the question that who made money ? Obviously early buyers and those opted for cheap Long Dollars were the real beneficiaries as Rupee closed at 108.25.

Following day was another interesting day as banks that were holding long US Dollar position against Pak Rupee had to book loss, as Rupee recouped its earlier loss after FM Dar decided to step in support of stable Rupee.

It is still mind boggling that when we have Semi-Float exchange rate system then why SBP’s External Relations Department had to come up with a Circular explaining that 3.1 pct exchange rate adjustment will address the emerging imbalance in the external account and strengthens the growth prospects.

Unless Exchange Rate structure is pegged, in a Semi- Float Exchange Rate mechanism Central Banks/ Governments do not have to notify fall in the value of currency. It is always the market force that through supply and demand factor determines the exchange rate direction.

Therefore, in my view, FM Dar did nothing wrong when he decided to intervene, as he is the Chairman of Monetary and Fiscal Policies Co-ordination Board and therefore he had acted under the law, as per SBP act 9 B (6).

Over the years, Exporters, Economist, Researchers and IMF are persistently demanding sharp depreciation of Rupee based on Real Effective Exchange Rate (REER) mechanism.

Recent history suggests that constant targeting of economy through REER is no more a contributing factor, as it is a failed economic approach.

There is clear evidence as data of last 10-years clearly suggest that despite 72 pct depreciation of Rupee, Pakistan’s exports failed to respond. Then the question arises that who are the real beneficiaries of weak Rupee. Of course if Rupee depreciates, Exporters will pocket excess Rupee against its foreign exchange receivables.

Economist/Research analyst are paid and forced to talk of a favorable market condition or else they will be loitering on the streets because in a declining or Bearish market they become useless.

While, IMF has a task to keep countries constantly engaged all the time through its tough conditional lending for longer duration, as interest earning through IMF lending is their major source of income.

Therefore, critics should not only refer to REER mechanism, instead they should come up with a explanation and proposition by addressing that how much is REER mechanism appropriate and effective to deliver in a Pakistani environment because in Pakistan it has completely failed to deliver in the last decade.

Central Bank Autonomy

Approach towards regulatory autonomy requires balanced point of view. It is true that that banking supervision and financial regulations require significant degree of operational independence.

Unfortunately Globally, Central Bank’s autonomy frequently comes under question due to inconsistent fiscal policy/support. There are many such examples, market witnessed oil averaging above $ 111 per barrel and Gold hitting all time high of $ 1917 per ounce in 2011. Inflation in 2012 in Europe and USA was around 2 pct, but interestingly ECB and FED opted for quantitative easing and zero interest rate policy, which was at the cost of Depositor’s Money that has inflated their bank balance sheet size to almost double to around USD 4.5 Trillion.

Funds were never given to corporate sector to stimulate economy. Sole purpose of liquidity injection to financial sector was to avoid banking sector collapse.

It is a known fact that governments all over the globe intervenes in Central Bank’s monetary affairs at various intervals to protect their National interest. Japanese MOF frequently intervenes in BOJ proceedings. South African Reserve Bank, People’s Bank of China, South Korean Central Banks and South American Central Banks too are known for active interference.

India is the most recent case as its Joint Secretary was sent to coordinate with Reserve Bank of India in its cash operations violating RBI’s management of its currency system.

It is a never ending debate, as governments all over the world would continue to interfere in country’s monetary affairs as and when required. Though Central Banks can play active role by applying its monetary tool to acquire Technical independence, but operation independence will never be easy to achieve because of frequent outside interference.

Understanding Exchange Rate Regime

It is widely acknowledged that in longer run monetary policy alone cannot contribute towards economic growth and job creation.

It is also an accepted fact that no single exchange rate regime is considered the best or most successful exchange rate mechanism. Therefore, a country should decide to adopt the exchange rate regime that suits best for its requirement.

Options offered by the Exchange Rate Regime are either Floating or Pegged. SBP opted for Semi-Floating Rate Mechanism.

While, for Pakistan REER has proved to be the back-breaker causing lot of pain and agony to economy with no gain in real sense. Over the years, Depreciation of Rupee has caused economic disaster instead of gains, pushing domestic prices of all food items to an extraordinary high level. It has caused sharp hike in Petrol, Gas and Electricity prices. Transportation prices have more than doubled. Hike had negatively impacted Rental, Education and Social Sectors.

Weak Rupee has pushed interest rate higher that had pushed cost of doing business higher and hurting exports. Spending money has become difficult in a tight liquidity environment that kicks budget deficit higher. Deficit financing has become very costlier. Ultimately any spending severely hits the debt side pushing it to new all time highs.

Meanwhile, SBP that opted for Inflation Targeting Monetary Policy Framework should stick to its explicit inflation target and should implement policy accordingly to achieve its target. But it is required to bring more transparency by adjusting its Target Rate in line with CPI Inflation.

It is noted that after cautioning the market since last 5-6 quarters, SBP has been incorrectly forecasting very high CPI number probably anticipating sharp rise in oil prices that may push inflation sharply higher that has not happened. SBP should realize the price government and economy is paying due to higher Policy Rates, which is very disturbing in the absence of Revenue shortfall and sliding exports. Therefore, it is expected that in its coming monetary policy SBP will make adjustment accordingly in line with actual data released instead of acting on mere anticipation/expectation, which did not prove correct.

Further, Pakistan has rightly adopted Stable Effective Exchange Rates policies, which suits our economy the best and hope it is likely to continue with the ongoing exchange policy rate stance and try to make amends on the economic front to correct weaknesses.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

 

 

 

Pakistani migrant workers victims of oil shock

@asadcmka
Asad Rizvi 

 

Economic Outlook, July-December 2017

@asadcmka
Asad Rizvi 

After the release of 3rd quarter FY-17 SBP report, a lot has been said and written about the economy, but I still believe that market is not addressing and is not concentrating on the basic economic problems.

The truth is that overall our economy has a developed large size “Black Hole” due to unaddressed issues and therefore it is faced with many challenges because of underlying weaknesses.

As we are heading for elections, in number terms with present government’s stance I do believe that economy will perform well and is unlikely to stumble in FY-18.

It is simply because money will be dumped and in any debt ridden economy when cash is injected either by borrowed means or otherwise, the economy is bound to do well, as added liquidity pushes growth higher.

However, despite CPEC in place, with its continued policy of current growth pattern economic surge will not be sustainable in medium to long term due to severe income constrain.

Meanwhile, over the years (decade) despite depreciation of Rupee, sharp cut in KIBOR rate, subsidies given to business community in shape of cash, rebate, tax and other incentives our market has never responded positively.

Furthermore, in the absence of much needed policy support, outdated methods, equipment’s and strategies, high cost of doing business and lack of burning wish to excel, the economy cannot perform at its maximum to attain desired level of growth, it then ultimately have negative impact on economy.

If we compare between types of relief given to the business community in recent years and the hardship faced by them (incentive & constrains). I would say business entrepreneurs are blessed with goodies, which is why they have become complacent and are often too demanding when they under-perform. The reason is obvious, as government provides them comfort at the cost of tax payer’s money and their demands are comfortably met.

Here are few good examples. Banks are minting cash in billions by investing in risk free government securities at the expense of economy and not contributing towards much need growth at same proportion. Despite sharp cut in Discount Rate in 2016 Commercial Banks earned profit of Rs 190 billion against Rs 199 billion in 2015.

Despite easing of Major Currencies against US Dollars, the car makers are fleecing the nation by not adjusting the prices accordingly.

Petroleum prices are down by nearly 30 pct from the highs, but transportation cost is not adjusted at same proportion.

On July 12, 2012, wheat price was USD 9.12 per bushel, which crashed to hit USD 3.81 per bushel on Sept 15 2014 and is now currently trading around USD 5.6 per bushel. But in Pakistan wheat support price has been raised from Rs 1100 per to Rs 1500 per 40 Kilograms, while in 5-years, Rupee against USD has weakened by nearly 11+3 = 14 pct. Similarly Sugar, Rice and Corn prices are down by around 35 to 45 pct.

Unfortunately benefits of the fall of basic food commodity prices in the international market have never been passed to the end user nor did it help in increase in tax collection.

Meanwhile, during this period (2007-2017) rental properties and real estate prices surged by nearly 5-8 times, but revenue collection on transactions is a mere joke that helps tax evaders to manipulate the economic system enabling them to park their funds in properties.

Difficult economic condition at home was created to reduce public expenditure on IMF’s demand that helped to bring down fiscal deficit to a desired level resulting tougher social condition.

If we look at the entire perspective of issues of last 3 or 4 decades the economy has always succeeded in dodging the structural reforms. While, in recent decades government spending and (ratio of Bank Advances to Private Sector) suggest that austerity measure was/is the biggest culprit hindering real growth/stimulation.

Therefore, unless the crux of economic problem is addressed and corrected the economy will continue to haunt the economic managers.

SBP Monetary Policy Stance

After all the hard work in last 3 to 4 years, SBP lost its firm grip on the market as it could not read the market trend correctly. Since last year and a half Central Bank’s Monetary Policy Statement suggest that it has been over cautious about inflationary threat, which was never there, as oil comfortably averaged below USD 55 per barrel. Targeting 6 pct inflation rate was an “Exaggerated Estimate”, which was never a possibility. This is why CPI for FY 17 ended at 4.16 pct, which is well within my target of 4.25 pct.

Since SBP was targeting 6 pct inflation rate in FY 17, it did not slash its Policy Rate, which should have been lowered by 100-150 basis point. Lowering of interest rate would have paved way for MOF to slash PIB coupon rate at same proportion.

Such action would have provided room to reduce government’s cost of borrowings by nearly Rs 250-300 Billion that would have helped in attaining its Revenue collection target.

For FY-18 SBP is once again targeting 6 pct inflation, which in my view is on the higher side. Even with 5-7 pct depreciation of Rupee I do not see inflation beyond 5 pct. In next 2-quarters I do not see inflation surging sharply for two reasons. Oil prices in (July-December) will comfortably average around or below USD 52 per barrel. And secondly with the help of food support price at current levels, healthy monsoon season and good weather condition, crop condition will remain stable for next six months.

Therefore, in all probability, I do not see inflation surpassing my January 2017 Outlook target of 4.80 pct and is likely to stay within 4.5 pct to 4.80 pct band (July-December).

Further to attain 6 pct growth and Rs 4 Trillion Tax Target SBP will have to act and take pro active measures. It is required to make sure that promised funding of Rs 1-Trillion each to Private Sector and Agriculture is timely injected.

Price Stability

Price stability is one of the key mandates of SBP that should allow economic growth. To optimize, policy should be formulated in such a manner that it must help to predict the future prices/trend.

In last FY with inflation constantly staying around 4 pct or slightly above whereas SBP was targeting CPI @ 6 pct , it makes no sense or was/is this intentional to keep Policy Rate higher. Or if SBP disagrees with my argument then how does it define price stability to defend wide gap between inflation number and Policy Rate and what is the objective behind this strategy ? It is this juxtaposition, which is confusing.

There is another huge discrepancy, which has never been discussed. Since last couple of years SBP 6 month outright forward rate averages around 125 paisa, which means based on swap points, exchange rate and funding cost in USD, Rupee’s average Cost is well below 4 pct. (Formula-Swap Points X 365 / Ex Rate / # of days + Libor = 6 month interest rate), whereas SBP Policy Rate is currently 5.75 pct. Therefore, based on SBP 3-month or 6-month swap points, Policy Rate should be around 4 pct for 6-month. Or otherwise 6-month Swap Points should be around 225 paisa instead of 125 Paisa (current). This puts a question mark on SBP’s inflation and price stability policy.

Therefore, even with 4 pct Policy Rate, Rupee will remain attractive because of interest rate differential advantage. As potentially there is room for another 25 basis point US interest rate hike, but I do not expect it to happen in remaining two quarters of 2017. Neither do I see European Interest Rate Hike beyond 25 basis point.

Further, in another recent move according to SBP Master Circular – OMO, as part of its monetary policy implementation under revised interest rate corridor framework, it says SBP will keep money market O/N Repo rate close to its “Target Rate” (5.75%). To me this is clearly a hint that SBP will opt for softer rate stance, which is globally practiced to reduce cost of borrowing. Hence, by 150 basis point cut means annual deficit financing can be reduced by nearly Rs 300 billion.

Rupee/US Dollar

FM Dar’s statement on Rupee depreciation will give more clarity to the inter-bank market, as market remained nervous and choppy since yesterday.

It is worth noting that 73 pct depreciation of PKR against USD in last 10-years has never helped Pakistani exports to make big strides in the international market. I would once again reiterate my earlier call that minor adjustment is OK, but since Pakistan is not a manufacturing or industrial country, Rupee depreciation will not help large surge in exports.

We have to make a quick shift in our strategy. Our Wheat, Sugar and Rice are too expensive because after providing support price subsidy to growers our commodity becomes too costly to sell in international market and then we are not competitive. Cotton our main source of exports in past continues to look gloomy, as we have to move beyond to meet local demand by revising tax slab.

To gain maximum in terms of trade volume, Pakistan is required to make a change in its approach by contacting high income countries. Textile industry should be allowed to operate at the fullest, as high energy cost is a discouraging factor. Cost of doing business is too high, which needs to be arrested so that the industry is run in full capacity. The industry is still faced with refund problem that needs to be sorted out, as under investment is another troubling factor.

While, remittances would remain a major source of income to fund current account, but minor dip is a possibility as softer oil prices may add pressure and FY end (June 2018) could still see a minor drop in remittances by nearly 3 pct.

Based on above facts, my view on Rupee remains unchanged, as projected earlier in January 2017 outlook. I do not see any reason for downward adjustment of Rupee, which should not move beyond 2 pct (plus/minus). There is no change in my Fiscal Deficit target of 4 pct.

Meanwhile, drop in PSX from my earlier given target of 53.000 to 42.000 is intact, but then it should hold. I will not be surprised to see another spell of fall if banking sector stocks fails to hold its breath.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).

Why I do not favor ARAMCO Sale ?

@asadcmka
Asad Rizvi 

My argument that why Saudi Arabia should delay or cancel its ARAMCO sales is based on analysis of past market behavior, which has political and economic twist too, as oil price collapse in last quarter of 2014 is a good example of oil producers complacent attitude costing them turbulence and economic uncertainty at home.

In past, we have witnessed that oil experts completely ignored/failed to identity the US Shale Oil Revolution, which was purely due to lack of vision, as planners were unable to read or interpret the writing on the wall.

More importantly, oil producers will have to accept/realize the fact that the current global growth pace is not enough to create extraordinary demand for oil.

Furthermore, FED policy makers plan to reduce the size of its $ 4.5 Trillion Balance Sheet in 2017, if the economy remains on track is not good news for Hedge Funds and Oil Traders, as it will squeeze liquidity.

Supply glut is a never ending problem unless oil supply does not exceed demand. Neither unlike past hidden and known Geo Political and Middle Eastern conflict/factor supports the cause anymore.

Whereas, with the passage of time technological advancement in shale, it has sharply increased the Rig Count Due to lower production cost. Some estimates are suggesting cost dropping to or below $ 40 per barrel, which should be taken as oil benchmark price for shale.

To give you another e.g. that how international politics get involved in economics, in a most recent development, US bill to impose new sanctions on Russia is said to benefit America. On passing of bill Germany is furious and accusing USA of its undisclosed plan via energy blockade that will support American natural gas suppliers at the expense of Russians.

Any such blockade will result penalizing of European companies participating in Nord Stream 2 project. Other than Germany, fines will also be imposed on host of European nations such as Austria and France, as after the completion of Nord Stream 2 project pipeline, it will carry Russian gas across the Baltic.

However, this bill is required to obtain US House of Representatives approval and then if Trump signs then the bill it will become a law.

Therefore, to obtain best result, proactive stances are required to counter the hidden agendas that will never come under discussion. I firmly believe that despite other unfavorable factors oil prices will remain under pressure until ARAMCO sale is finalized. This is why I am supporting quick announcement of cancellation or delay of ARAMCO sale until next 5-years.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

 

Saudi Arabia should Delay ARAMCO Sale

April 24, 2017

https://asadcmka.wordpress.com/2017/04/24/saudi-arabia-should-delay-aramco-sale/

I fully support Saudi Vision 2030, as basic idea is “Economic Prosperity”. But I have reservations about its public announcement to sell 49 pct stake in ARAMCO in next 10 years.

Despite Shale factor, Aramco selling is the other major cause of lower crude prices to buy its shares at a cheaper price and hence, oil prices will remain under pressure until 5 pct IPO is sold.

In my humble view Saudi government should reconsider its proposal to offload 5% of its stake via IPO in 2018, which is estimated to generate USD 100 Billion. On an average if Oil prices are higher by $ 20 (annually) it will generate nearly USD 75 Billion.

Saudi Arabia should announce delay in selling of ARAMCO stake until further notice or postpone selling until next 5-years and see the magic or else prices will once again dip down to average around USD 40.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

Effects of UK Election on Pound Sterling

@asadcmka
Asad Rizvi 

GBP @ 1.2953 = Recent strength of Pound Strength was surely backed by hope that May’s Conservative party will win elections with landslide margin. But latest opinion polls suggest it is not going to be a cakewalk for the Conservatives.

The key point in for May’s party in this election is that her party requires a minimum of 326 seats to establish itself as a majority party in parliament so that it can easily rule without any outside support.

Latest opinion polls suggest there could sudden shift in voter’s stance, as Labour’s Jeremy Corbyn has gathered momentum and are likely to catch up fast to narrow down the lead.

Interestingly Torries that enjoyed 17-seat working majority took the chance in a hope to increase its count hoping for an easy sail of her boat towards her Brexit destination.
Now there is an increased probability that her party’s plan may backfire, as any shift in voter’s stance could be the result of outcome of some of major policy shift by the ruling that may demoralize the investor’s sentiments.

Though the chance for Labour victory is almost nothing, however a surprise win or hung parliament could witness Pound Sterling crashing by 8-10 big figure.

But even if May fails to get the majority votes or if the gap widens against expectation, it could be very tough to manage business and so would Pound plunge. Hence, the magic number to watch is 300 plus or minus. Higher number means less pressure and lower if it goes, which means tougher opposition stance.

Therefore, anything around 330-335 seats or above will see Pound Sterling making mild upside towards 1.33-35 zones before exhausting and disastrous number to watch could be around 290 seats or below, which see Pound sinking towards 1.20 zones. I am expecting Pound to crash.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

 

Budget Overview 2017

@asadcmka
Asad Rizvi 

In my pre-budget note “Budget Perspective” I said that the budget will have nothing much to offer because we are a “Cash Squeeze Economy”. My estimate is that Pakistan’s economy is cash short by roughly Rs7 to Rs 8 Trillion.

Budget paper did not care to discuss much about the future strategy that how government plans to counter the growing economic concerns.

The approach looks pretty relaxed and complacent focusing mostly on revenue expenditure that covers routine expenses such as salaries and pensions, while capital expenditure that refers to long term spending, which is investments infrastructure was casually discussed, probably aware of funding squeeze.

Hence, I can safely point out the missing link, as the golden rule of Public Finance demands Revenue Expenditure to be financed by Revenue Receipts.

One thing is for sure that after going through the budget detail and keeping in view the timing that involves quite a few facts, I can easily sense that the government opted to wait until the final judicial ruling, which is due in near term.

In my view, if the judicial opinion goes in their favor the government will go for all out aggressive ad hoc spending in shape of mini budget.

Overall, the impact of budget will not bring any change in the livelihood of people, which is going to be more or less same, as it was before the budget announcement, unless retailers take unnecessary price advantage in the absence of active consumer protection law.

OVERVIEW

Stock Market projection from My “Outlook 2017” = PSX @ 47,806 = Range 42.000 to 53,000. Likely to hit upside, but I am not ruling out large correction”.

Flat rate of 15 pct for filers and 20 pct for non-filers is a move in right direction because it is heaven for tax evaders.

My projected target of 53.000 is met, now care should be taken, as market could react to the Budget Tax proposal. I am not ruling out extreme volatility and sharp dip.

-Preferential treatment given to Real Estate Market is disastrous for the economy and main cause of economic mess. It provides tailor made opportunity to park illegal money to the evaders.

Today, extraordinarily high rent is a major cause of if high food and commodity prices in Pakistan that has broken the backbone our nation. A genuine salaried tax payer can never buy a property in Pakistan.

Agriculture Credit target of Rs 1.001 Trillion is the best part of Budget announcement, which needs to be align with Bank Credit to Private Sector. It will ensure governments 6 pct growth target.

It is easily possible by setting a formula. All SBP needs to do is to set up a quarterly target of Rs 250 Billion and those missing/violating the target should be asked to offload 4-times the size of its Bonds Holdings (T/Bills-PIB-Sukuk). Simultaneously SBP should withdraw of lower is Corridor interest rate floor.

-Enhancing of rates of withholding tax for non-filers is not the cure to the problem, as they should be panelized at all cost for violating rules/law. It is simply an excuse and acceptance on part of the government that it cannot take action against the upper class. Instead poor class of the population will have to pay the price for their wrong doings.

Withholding tax of 1 pct from 0.5 pct on Electronics, manufacturer, wholesaler, distributer etc is a move on right direction. When economist/analyst argue that Rupee Depreciation will help in arresting rise in imports, then this is a better option as it will all help in adding revenue though indirect.

Corporate Tax reduced to 30 pct from 31 pct is a preferred choice of business community. In 2013 corporate tax was 35 pct. This is especially very supportive for Banks, as it has substantially eased pressure of 4 pct Super Tax imposed on them. Now it’s for the banks to deliver by providing Credit to Private Sector and Agriculture Sector.

Despite sharp fall in SBP Policy Rate over last couple of years, Banking Sector is still enjoying hefty profit and earned Rs 190 Billion, as profit fell by mere Rs 9 Billion due to 62 pct investment in risk free government paper.

Referring to Super Tax, Banks often talk of Constitutional violation, but let me remind banks that Bank Lending to Private Sector is 51 pct against 62 pct investments in government bonds. This is why economy is suffering.

-Taxes imposed on Cement and Steel is minor in size and does not hurt majority of the population.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

 

Budget Perspective FY 2017-18

@asadcmka
Asad Rizvi 

“Budget” is knocking at the door, which is an annual feature. The only thing special about this coming event is that it’s going to be Election Year Budget, which is most likely to offer some sort of fiscal relief to gain popular support by burdening the exchequer.

It’s a common election strategy practiced almost all over the world. But the worrying part is that increased government spending will add pressure on the national kitty, as resources are scare due to low revenue collection and poor export receivables.

Presentation of government’s financial plan will simply be a proposal about its projected revenue and spending. Sadly, due to extremely tight liquidity condition (Domestic and External) and highly inflated debt ridden economy, our National Budget is no more going to be an exciting event.

There is a high probability that rules will be further tightened on Direct Taxes. The need of hour is that the government should go for an all out attack on Tax evaders as aggressive strategy of Budget Tax Crackdown is the only option to raise taxes.    This August, Pakistan will be celebrating its 71st year of independence. Thought provoking question is that during all these years what did the nation achieve in economic sense? It is embarrassing that we cannot proudly highlight any specific notable economic achievement.

It is because all these years focus of respective governments has been on bragging, self praising its economic performance without realizing the real problem faced by the large part of the population, which is housing, population, health, food, education, water, energy, transportation and communication.

For how long will the economy survive on castle of false hope? The truth is that present shape of our economy is the political outcome of decades old clientelistic policies at the expense of fiscal sustainability and social injustice.

In Pakistan, greed has risen sharply to such an imaginable level that corrupt elements have become more influential on the basis of wealth. They should be eliminated through legislation.

Government will have to realize that in such a situation temporary standard solutions do not work in favor of bottom 75-80 pct of the population that live below or around the poverty line.

Historical Budget Data suggest that Pakistan’s annual financial targets are always forcefully met after filling of the gaps through adjusting entries due to funding shortfall.

Pakistan’s rising Debt figure (Domestic & External) and annual Debt Financing Data depicts true picture of the worsening economic condition. It is due to lack of economic support caused by corruption and poor governance, structural imbalance in economy, inefficiencies and trade barriers (national crops/support price).

The real threat is that the economy is fully exposed to various elements, whereas sizable part of Domestic Economy is undocumented that does not support the cause, which makes Pakistan’s economy more vulnerable to both internal and external factors.

It is extremely important to ascertain and address the root cause of economic problem that why Pakistan’s growth rate of 4-6 pct is not sufficient enough to counter odds and why fruits of growth are not reaching across the poverty line.

The benefits of current growth will never reach the poor of the society unless fundamentals are checked and corrected. Simply celebrating growth in overall percentage term is meaningless and misleading as it never depicts true picture of the economy.

Why majority of the people are suffering?

It is because despite Pakistan’s growth rate historically averaging around 4.25 pct, its living standard have gradually squeezed due imbalance caused by high inflation, weak wage growth and weak Rupee, which was/is never adjusted in same proportion.

The truth is that over last 10-years as per State Bank data, private sector growth has been very weak. Drop in Advance/Deposit Ratio to 51 pct tells the sad story about bank lending to private sector, as banks have parked major part of their deposit in government paper.

Therefore, instead of totally relying on CPEC, policy makers should focus on Private Sector growth in an aggressive manner. Commercial Banks cannot dictate SBP or MOF, as all they needs to do is to reduce cost of financing by slashing Discount Rate and Coupon Rate. Remove the floor rate and or further widen the SBP Corridor floor/cap gap after slashing the Discount rate as 6.25 pct is too high that will help in adjusting the SBP Target Rate.

Simultaneously give a time frame and put a cap on investment in government securities. This strategy will definitely see return to robust economic activity, as bank lending will surge sharply.

GDP Data Accuracy

Accuracy of Global GDP numbers are frequently disputed because good part of statistics contradicts theory or actuals. In present times economist/analyst think China and India is a suspect.

Greece was responsible for initiating 2008 European turmoil through creative accounting with the help of special swap arrangement by applying fictional exchange rate i.e. it issued other currency bonds for its Euro needs that exploded. Similarly, in past with the help of US Banks, Italy opted for same strategy to mask its widening debt. And in 2014 accuracy of Japan’s GDP against official data of 0.9 pct fall was disputed as BOJ projected 2.4 pct actual growth.

This is not an accusation, but Pakistan is often blamed for manipulation. More importantly the point is that at some point Pakistan will have to repay, reduce or manage its debt at some stage and it is then when disaster will occur.

There are plenty of Fiscal/Monetary Policy related queries pertaining to Pakistan’s economy like adjustment of Circular Debt as Rs 315 Billion is one pct Deficit and it certainly impacts growth rate. This is a permanent problem that needs to be sorted out. 

Key Areas that need immediate Attention

-What is the funding source of annual Deficit Financing and for how long will the country survive on borrowed money (External & Domestic)?

-If estimated inflation rate for next 2-years is around 5 pct and FM dose not see inflation pressure then why government is paying excessively high return on its 5 year and 10 year bond coupon, which is double of the inflation rate, as it is one of the major causes that has led to higher debt?

-And if the inflation rate is so low then why is SBP not making downward adjustment of Discount Rate and Target Rate to give further breathing space to business activity and reduce government’s expensive borrowings?

-If 8.000 to10.000 MW of energy is added in the system, then fuel cost at current price will increase by roughly USD 3.5-4 Billion. How will the country manage to pay this excess fuel bill? Budget paper should provide details.

-Providing subsidy is a common solution to business community’s demand at taxpayer’s expense. Budget paper should provide detail of estimated subsidy amount and the cost to be beard by exchequer along with projection that against subsidy how much will the business community pay back in return in terms of employment, tax and foreign exchange.

-After allocation of subsidy it should be clarified that no concession of any sort or bank support will be extended on earlier subsided product and those found protesting will be panelized and deprived from future rebates or any type of concessions. It will be Governments prerogative to make policy changes in best national interest.

-Budget paper should give reasoning for government’s Media Advertising Spending Plan that why and how much it wants to spend and highlight its project in Print and Electronic Media, when the project work was a commitment to the nation based on its election manifesto. Budget paper should also tell that how the nation will benefit from these Ads, which is taxpayers money.

-Since budget is all policy proposals for undertaking government expenditure, it should provide estimated amount and detail of all Domestic and External Borrowings for FY 18.

The paper should also give reasoning of both (internal & external) borrowings. It should elaborate that how borrowing will ultimately benefit government and when and how it will help to get rid of loans.

Managing of Fiscal Affairs

Monetizing of government borrowing through purchase of government paper has reached extraordinary high levels, which is Rs 8.62 Trillion (outstanding stock) of which only 20 pct is of Non-Banks/Corporate and 80 pct Holdings of GOP Securities is of Schedule Bank or is 78 pct of total Demand and Time Deposit., while share of Bank Lending to Private Sector is mere 51 pct.

Since we are Deficit Economy it is important to understand that to manage Fiscal Affairs, Money is created out of Debt by Central Bank, which is paid backed (Debt plus Interest) unless available cash in economy is in surplus. In this situation keep a close watch on Money Supply, which is always high.

This is why SBP plays key role and is responsible to manage liquidity in the banking system. But it does not own the debt. Instead, in a way SBP is Governments Private Bank, as they cannot offer free money, hence in exchange Bond is created. And remember whenever, we say “Bond”, it always refer to “Debt”.

Conclusion

In my “Outlook 2017”

https://asadcmka.wordpress.com/2017/01/01/outlook-2017-pakistan-outlook/

My growth projection for FY 16-17 was 5.25 pct. I did not agree with the governments projected growth target of 5.7 pct. It is a sad moment that government had to make downward revision of its growth target to 5.28 pct.

For FY 17-18, Government is targeting 6 pct growth. I will stick to my earlier forecast that in next two quarter (July-Dec 2017) I see growth rate of 5.35 pct or better. Election year funding will play key role to push growth rate notch higher, but still 6 pct growth looks tough to me unless Discount Rate/Target Rate and Coupon Rates are slashed. Floor of SBP interest rate Corridor is removed or further lowered. Aggressive and targeted Bank Lending to Private Sector and Agriculture Sector is required to push growth higher. Or else discussion will move around CPEC and growth could flatter around 5.25-50 pct.

Unfortunately, Pakistani industry is inefficient as focus is primarily on low margin goods that requires low skilled, low paid workforce. Pakistan would continue to move in snail’s pace unless leadership is visionary in broader sense and move fast towards industrialization such as electronics or modernization of its ship-breaking industry or bring revolutionary changes in agriculture sector instead of depending rebates and subsidy.

Revamping of outdated education sector along with changes of amateur, uneducated management is a necessity. We have to shift our focus from, Social Studies, History, and literature, Civics or Political Science. These should be secondary subject as Physics, Chemistry, Computer Science, Electronics, Industrial Design, Metallurgy, Engineering, Finance, Management and Quality Control. To excel in education this is where Finland, China, Germany, Singapore and Korea are focusing to groom their young generation.

 

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

 

 

Why Weak Rupee will never Help Exports ?

@asadcmka
by Asad Rizvi
In Pakistan’s financial market, exchange rate is one the most favorite topic, which is commonly discussed at all levels based on reports/view (foreign & local) without providing evidence that why/how weak Rupee will contribute towards strengthening of economy. In last 10-15 years, exports in Pakistan have never responded to weak Rupee Policy.

Instead, weak Rupee stance is one of the major causes of economy misery (Inflation) at the cost of nation that has inflicted sever damage to their well being during all these years resulting continues hike in prices of Real Estate, Petroleum, Gas, Electricity, Bread, Rice, Sugar, Eggs, Meat, Poultry, Lentils, Vegetables, Vehicles, Transportation, Household Electrical/Machinery etc that has sky rocketed prices of all household items to an unbelievable levels based on per capita income (wages/income).

All those Pundits that have been demanding depreciation of Rupee by 20 pct for quite sometimes are basically followers of outdated bookish theory preferring copy paste procedure, because none have ever given a number in past/present that how much depreciation has contributed in growth and how much will 20 % depreciation further add/contribute towards GDP growth rate, increase/add Foreign Exchange Reserves in US Dollar term, increase/push Revenue Collection higher and bring relief/easing of Current Account Deficit/Trade Gap.

Without providing number input by those screaming Rupee is overvalued, if the argument is only based on Exporters demand or REER (Real Effective Exchange Rate) based calculation, which is a flawed model that has very little following all over the globe then it is considered a hollow argument.

Because as per REER, adjustment of currency is based on differential between domestic and its trading partner country’s inflation rate and trade deficit. This is why they demand Rupee parity against USD should be @ 126.

Based on similar REER calculation then Rupee should be annually depreciated by 4-6 pct and in next 5-years parity should then be Rs 160 per one US Dollar, as Fed Interest Rate in next 10-year will remain below or around 2 pct as US interest rates will exhaust to put brakes on high borrowing cost.

This is why to give boost to growth and to finance deficit borrowing cost is kept low by the Major Global Central Banks that had opted for Unconventional Monetary Policy.

Crux of My Argument

Pakistan’s business model suggests that we are basically opportunist, as we only looking for self gain at the expense of others always demanding rebate and subsidies. In last 2-decades or so the size of our GDP has grown by nearly 4-times, but Tax to GDP profile speaks in volume that we are tax evaders and prefers to hold cash money, which is why Currency in Circulation has hit Rs 3.59 Trillion or 63 pct of the total size of Commercial Bank Advances.

Meanwhile, Exporters and so called self imposed Guru’s have never uttered a positive word about the benefit they are enjoying from sharp cut in Discount/Policy Rate from 10 pct to 5.75 pct and Export Refinance Rate dropping down to 3 pct from  8.4 pct. This is extraordinary relief given to the community.

Further, at the time of lowering of projected Discount Rate/Target Rate, “Rain Frog” group popped up demanding halt in Rate cut, blowing trumpet that cut in discount rate will have adverse impact on exchange rate, which will sharply weaken Rupee.

This theory has vanished into thin air. They had no clue about the favorable interest rate differential factor, which gives advantage to Rupee and makes it attractive because of wide interest rate gap against Major/Minor currencies.

I am not sure if someone has the guts to come up with real/estimated numbers to tell readers that how depreciation of Pak Rupee can bring increase in Pakistan’s exporters share in foreign market ?

What type of products in bulk exporters can offer to become competitive, because to obtain better pricing export size has to be large as per market demand ?

How will depreciation of Rupee bring increase in sales to boost economic growth and create new jobs that will concurrently help in increasing corporate profits by engaging foreign markets that will ultimately help push much needed Revenue Collection higher?

The truth is that demand for depreciation of Rupee and blaming overvalued Rupee for fall in exports is a stale therapy and outdated wish list, as global trading norms have changed.

Why Weak Rupee will never help Exports ?

Today I will try to explain in detail to silence the critics. Economically by maintaining a balance to a sustainable level, it is a perfect strategy for the manufacturing and industrial economies such as China, Japan and ECB. From 2014 until 2016, similar pattern was witnessed in South Korean and Australia. In recent times Canada and Brazilian economy is faced with identical situation, but current trend is not as helpful.

Since all aforementioned countries are manufacturing and industrial economies, hence when they Devalue/Depreciate their currencies their exports become cheaper and tourism becomes attractive too, which helps to improve its overall job market (Consumer & Manufacturing) that simultaneously give boost to its domestic economy.

This theory does not apply to Energy (OIL & Gas) producing economies, as witnessed in oil dependent economies because oil is a commodity and unlike manufacturing products its consumption is limited. Hence, recent oil collapse proved to be a disaster for Venezuela, Russia and OPEC members.

If we compare two scenarios with each other the answer is very simply, when manufacturing economies weaken its currencies they can become competitive as their export could surge and its economy is likely to get boost. Its tourism industry too attracts good number of foreign visitors that helps both the sector.

While, all the oil producing/exporting economies are totally dependent on their oil sale, but drop in oil prices have adverse impact on their respective economies because their oil receivable gets sharply squeezed. In falling oil trend it neither creates new job opening nor oil sales gets boost because consumption of oil importing countries remains unchanged. It does not impact its tourism industry, which is comparatively small in size.

Pakistan’s economy does not fit in both the scenarios. Here, what is our status ? I mean, after depreciating Rupee what do we have to offer in bulk size. Basically our suffering is due to ill planed policy flaw, as we can only offer raw material in small lots. This is why over a decade though Rupee lost 72 pct of its value against USD from 62 to 104.85 and yet Pakistani exports are in continuous struggling mode. Remittances are the only hope that is doing well despite disastrous economic condition in Gulf Oil producing countries. In such economic condition it is shameful excuse to blame 2 pct fall in remittances, which is meager in size and likely to increase in size in next two-months. Weak economic condition in Europe is also a contributing factor that saw mild dip in inflow.

What should bother most and is alarming and is a matter of concern that despite sharp fall in the value of Rupee over a decade and plunge in oil prices since last 30-months, import bill is hovering at a very high level that has sharply widened the trade gap.

Pakistan’s exchange rate history will provide further guidance that weak Rupee strategy has never responded to arrest rise of high import bill, as it’s purely a Fiscal matter that can only be checked through policy changes at Federal level by imposing high import duty.

Over the years, weak Rupee and abnormally high return in investments are two major factors that have severely dented the economy costing nearly Rs 4 Trillion in excess to the Exchequer. If ongoing stance remains unchanged, annual deficit financing in next term will reach Rs 2 Trillion and by end of next term Debt will get closer to Rs 30 Trillion mark.

It is recommended that Rupee should move in line with its competing partners and should appreciate by 2-3 pct. Recently against US Dollar Indian Rupee gained by nearly 5 Pc. Euro, Pound Sterling and Yen too made sharp gain by around 4 to 5 pct. South Korean Won is up by 6 pct, Vietnamese Dong and Philippines Peso is almost unchanged.

Similarly, IMF & other agencies for next 2-years is projection to remain 5 to 5.5 pct, which is encouraging then there is no point offering higher yield and high coupon rate, which should be slashed accordingly.

SBP has done remarkably well by effectively managing its exchange rate and policy rate that has helped in implementing financial and price stability as per required norms. Fiscal reform is the key for next direction or else downside economic risk will prevail.

 

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

Pakistani Bond Market Outlook

@asadcmka
by Asad Rizvi

Yesterday’s T/bills auction result provides further guidance that the government is worried about the extra cost it has been paying for years due to accumulation of debt largely caused by higher Discount/Policy Rate that has badly hurt growth. I think what should more worrying factor is the repayment plan, which is pushing stocks higher.

Fiscal managers may argue/think that until external debt reaches threshold level of 50 pct of the GDP, which is currently around 26 pct there is nothing much to worry about, as this level will not be reached in next 10-years. But with the ongoing economic trend the economy cannot afford reckless and smug approach, as borrowing for repayment purpose will remain a daunting task as size and cost will rise at a faster pace.

Fiscal Managers should take a leaf from the theoretical problem they face due to high level of Domestic Borrowings, which is not utilized for productive purpose such as infrastructure development or structural reforms, instead borrowing is done to pay interest and rollover of maturities.

Though government may claim to have avoided monetization, but they had to pay extraordinarily high interest rate payment to the bond holders through backdoor (OMO) to manage deficit and meet to IMF numbers.

However, the pressure is likely to mount as cash flow crunch (Domestic & External) will continue to haunt the authorities because of low Tax to GDP rate, falling export trend and high import (raw material purchase) and unnecessary import of luxury items. Increase in energy production should boost the economy or else it will add to the pain, as size of circular debt will further inflate that may become more worrisome factor.

As we are Debt Based Economy, ongoing economic condition since several years have lead to decrease in money supply due to cash squeeze in the banking system. To fill the gap State Bank of Pakistan is constantly playing role by using its monetary tool by providing assistance to this Fiscal related problem in providing funding through its regular fortnightly OMO’s and RS/USD SWAPS.

In coming Budget, I do not see major policy shift in its Fiscal stance that may give boost to increase money supply that may help to ease tighter liquidity condition. In such a situation debt burden is more likely to increase, resulting rise in foreign and domestic borrowings to manage the cost.

Unfortunately the economy for quite sometime is clogged due to,”Crowding Out” factor, which means government is borrowing against sale of bond. Hence Private Sector gets less money to spend, as less riskier bond is made more attractive by offering higher return. This is why since June 2013 GOP Securities have surged from Rs 4.721 Trillion to Rs 8.62 Trillion.

In his February 2017, Finance Minister Isaq Dar in his press note mentioned about shift in his strategy in managing Refinancing Risk of Domestic Debt by pointing that the Average life Time to Maturity of Domestic Debt has increased to 2.1 years from 1.8 years.

This is why government had to pay high price due to higher Discount/Policy Rate, as increase amount in GOP Securities was from July 2103 till date is Rs 3.082 Trillion.

Now as the nation is approaching Election year and the Financing of debt remains major cause of worry. I do not see any reason for hike in interest rate. Inflation is likely to stabilize around 5 pct as oil prices is unlikely to average above $ 55-60 and may dip below $ 50 because of 5 % ARAMCO sale. Oil glut is is another worrying factors.

Therefore, in all probability I do not see any reason for government to succumb to market demand to accept bonds at higher yield. As witnessed in 1st PIB auction of Q4, demand for higher yield was outright rejected. Since July 2017 against T/bills target of Rs 5.85 Trillion accepted amount is Rs 6.084 Trillion and against PIB target of Rs 700 Billion, amount of bond is in excess by Rs 98 Billion.

From here onward, I am expecting mild shift in auction strategy, as government will most likely refuse to offer higher return on bonds and may be willing to make minor adjustments in T/bills Rates, which suits them cost wise.

Therefore, while formulating strategy what Bank’s Treasury has to keep in mind is the overall size of GOP which is currently Rs 8.620 Trillion, hence, they cannot afford missing any auction, whereas as Central Bank has the liberty to offer cut off of their desire level.

In all probability, government bond until 10-years is still best bet, as I do not rule out cut in Policy Rate and Coupon Rate, which will arrest sharp rise of Domestic Debt and ease tax payer’s burden to some extent.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

Saudi Arabia should Delay ARAMCO Sale

@asadcmka
by Asad Rizvi

I fully support Saudi Vision 2030, as basic idea is “Economic Prosperity”. But I have reservations about its public announcement to sell 49 pct stake in ARAMCO in next 10 years.

Despite Shale factor, Aramco selling is the other major cause of lower crude prices to buy its shares at a cheaper price and hence, oil prices will remain under pressure until 5 pct IPO is sold.

In my humble view Saudi government should reconsider its proposal to offload 5% of its stake via IPO in 2018, which is estimated to generate USD 100 Billion. On an average if Oil prices is higher by $ 20 (annually) it will generate nearly USD 75 Billion.

Saudi Arabia should announce delay in selling of ARAMCO stake until further notice or postpone selling until next 5-years and see the magic or else prices will once again dip down to average around USD 40.

Dar’s Written Response to National Assembly

@asadcmka
Asad Rizvi

On Tuesday April 18 2017, I came across “Business Recorder” report regarding “Domestic Debt” query in National Assembly, put forward by PPP’s Shagufta Juman in Question Hour session.

According to the statement in response to her enquiry Finance Minister Isaq Dar in a written statement said that since January 2012, the government paid Rs 5.397 Trillion interest on total domestic debt amounting to Rs 54.325 Trillion.

Based on outstanding, as of December 2016 in next three years, total maturity amount is Rs 11.075 Trillion.

After the maturity date to meet the funding shortage, FM was quoted by the paper that it will be refinanced at different junctures, which means liquidity will be provided at the time of maturity or as and when funding will be required. Sadly there was no follow up questions on the floor of National Assembly.

Unless BR report appearing about FM statement is incomplete or partly covered on the subject, it is shocking to learn that the FM said it is difficult to calculate future interest payments at this time. This is unbelievable and shocking.

Yes, I do agree with FM’s statement that it is difficult to calculate future interest payments, as no one on earth can provide absolute number. But, with FM’s financial background, 3 to 5 year calculation should be on his fingertip. He should have provided projected number with ease. For example if the total cost of funding was roughly around 10 pct and now is 8 pct, it can be calculated accordingly. Based on current SBP target rate and PIB coupon rate in next 3-years Domestic Debt will surge by roughly Rs 5.5 Trillion and in 5 years it will add around Rs 9 Trillion to the current number. (These are approximate numbers).

What worries most is the size of Debt in amount (Domestic & External), which is growing rapidly and hence interest payment too is rising at an alarming pace. It is strange that despite exports constantly struggling and Low Tax collection if measured against GDP growth, it is off target and still the approach is too complacent.

No sir, then I smell rate. We cannot be misguided by the statement presented in NA. The Fiscal Responsibility and Debt Limitation Act (FRDLA) Debt to GDP has comfortably breached existing statutory limit of 60 pct.

The real truth is that since last 5-7 years there is severe liquidity crunch (Rupee & Foreign Currency), which is why SBP is forced to inject funds through its fortnightly Open Market Operation (OMO).

While Central Bank’s FX Swap data suggest utilization of USD 3.6 Billion facility (SBP Monetary Tool), which is not a healthy sign.

What bothers most with Debt to GDP Ratio currently around 64.5 pct and your vision is to bring it down to 50 pct in next 15-years, then please let us know that what is your basis of calculation if you find it difficult to calculate the future interest payments at this time.

 

Conclusion

 

There is no disagreement on 5 % to 5.25 pct projected growth, but it is unlikely to make major impact on Revenue collection.

Interest rate is a crucial monetary tool, which is the key driver for any type of economy, as it not only influences the cost of borrowings, but it also helps to provide insight into future economic market activity.

It is true that in our environment it is difficult to determine specific impact due to turbulent economic condition that also demands effective fiscal policy, which provides interest rate direction.

However, in recent times, structure of inflation targeting is successfully practiced by the Central Banks all over the globe due to changing circumstances to attain desired result.

This is why faced with crisis, Major Central Banks have changed its strategy by deciding to opt for proactive measures by introducing important toolkit “Forward Guidance” to determine likely path of future policy rate.

It suggests that unlike past, CB’s does not want to keep its strategies secret anymore. It wants transparency all over and hence, it prefers to interact and communicates with the market.

Pakistan economy may do exceptionally well in next couple of years, but challenges will remain immense. With ongoing trend, managing Debt (External & Domestic) will not be sustainable unless forceful measures are taken against odds.

Funding shortage in next 3 years could see combine Debt surging to Rs 28-29 Trillion and in 5-years to Rs 32-33 Trillion. This means annual debt financing will be around Rs 2 Trillion.

Interest payment of Rs 5.397 Trillion on total domestic debt does not include external borrowing cost. Higher interest payment is the price for offering higher return in Government Securities in shape of Coupon and Yield due to extremely cautious and friendly approach by not making downward adjustment of policy rates in line with record low inflation that should have been either in straight line or Flat Yield Curve costing nearly 25-30 pct or nearly Rs 1.5 Trillion in excess

If SBP maintains its current policy stance of hike its policy rate in hast it is going to add burden on kitty. A hike of 1 pct would mean additional interest payment of Rs 500 Billion in 3-years and Rs 800 Billion in 5-years

Let better sense prevail by withdrawing SBP floor/cap (Corridor) and by slashing Policy Rate and Coupon Rate.

 

Business Recorder

 

http://fp.brecorder.com/2017/04/20170418169361/

 

 

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

 

 

Remittances, Slap on the face for Critics !

@asadcmka
Asad Rizvi

I am not offending anyone, but trying to convey my message that it is our duty to make fair and honest comment, which is vital to our National Interest.

It is common practice in Pakistan to waste time and energy chasing the wrong leads. I am myself a big critic and never hesitate to point economic discrepancies to distinguish between claims and facts. I am firm believer in constructive criticism.

Since last eight months we have been witnessing articles and editorials in Pakistani Newspapers by the self-appointed so called financial experts that have been constantly forcefully criticizing, making noises and showing their concern about decline in remittances, which is proving to be erroneous, as the size in fall in 3 quarter of the current fiscal year is tiny.

It is because of their inability to analyzing monetary facts because the critics are not subject matter specialist.

The proof of the pudding is in the eating, as surge in March 2017 inflow of remittance to USD 1.694 Billion confirms Pakistan’s fiscal year end remittances figure will be close to my forecast of around USD 19 Billion, which is not a worrisome number.

This certainly does not mean the country do not have economic issues, they are huge in numbers and sizable too. Apart from Corruption, which is a major cause economic growth hindrance, the areas that need to be corrected are Revenue Collection, High Level of Import, Falling Exports, Looming Debt Bubble, External Borrowing and Payment Strategy.

High Level of SBP Target Rate & PIB/Sukuk Coupon Rate when inflation is comfortably below 4.5 pct, which is the cause of High Borrowing Cost and ever growing size of Deficit Financing that now, looks unstoppable. Liquidity Constrain forcing SBP to constantly inject funds in inter-bank market.

However, I totally support stronger Rupee, which failed to deliver result in last 10-yaers despite 75 pct Depreciation, but was one of the major causes of inflation pushing food and energy prices sharply higher. Instead stronger Rupee will arrest inflation and hold prices that will make life easier for common man.

I am quoting from my earlier written articles, which is available on my blog.

https://asadcmka.wordpress.com

Aug 16 = Recently on print and electronic media there is lot of bashing going on against government, blaming it for fall remittances by nearly 20 pct.

Argument given on Print and Electronic is totally weak as it is without any supportive evidence. The fall in remittances is annual phenomena. Historical evidence will tell that prior and few days after EID Holidays, which is normally 10-days period on an average, remittances do take a dip, as sender get exhausted after sending Eid and Zakat money.

Following month remittances flow is back on track, whereas pressure once again mounts at the time of Eid ul Azha and the trend remains almost identical.

January 2017 “Outlook Pakistan”

REMITTANCES = In Calendar year 2017, I do not see big fall in remittances, in later two half of FY 17 (Jan-June) flow will surge beyond USD 9.7 Billion. However, in remaining two months of July-Dec 2017, remittances may struggle to attain 9.5 Billion levels, but is likely to hit USD 19 Billion in four quarters of 2017.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

“Managing Pakistan’s Sovereign Debt”

by Asad Rizvi
@asadcmka

“Express Tribune” quoting MOF sources reported, Pakistan is likely to borrow USD 750 Million as short-term foreign commercial loan from China due to low cost of borrowing to pay back debt incurred during Musharraf era that matures on May 24 2017. Several Foreign newspapers have also referred “Express Tribune” story.

Before discussing I would like to add that National Economic Priority was and will always be my priority. To improve overall economic performance, sole purpose of my discussion in print/electronic media is to stimulate constructive dialogue and highlight major financial issues to counter misleading data/information.

About 10-years ago, I was anchoring business talk shows on AAj Tv Channel and on several occasions I have discussed matters pertaining to Fiscal (Budget & Tax) and all Monetary issues at length. I had the opportunity to talk to people at all levels.

External Debt was always in my agenda of discussion and I would frequently ask the Finance Minister, representatives of Ministry of Finance and reputed Economist about Pakistan’s repayment plan and its future strategy to pay back the loans.

On my query I was often given lengthy lectures and sermons by the policy makers insisting that my question is not relevant and is not in National interest, hence, I should void negative talk.

Interestingly today, majority of the critics of yesteryear’s are no other than those that have either actively participated in past or were keen supporter of foreign borrowings.

Half of them are still enjoying good relations with the current policy makers and the remaining half are either irritated or frustrated lot for reasons best known to them.

Back on the subject, for reader’s interest, I would like to remind that after a pause of five years, in February 2004 Pakistan issued $ 500 Million 5-year Euro-Bond. In January 2005 Pakistan issued $ 600 Million 5-year Islamic Bond (Sukuk). On March 23, 2006 Pakistan issued $ 500 Million 10-year and $ 300 Million 30-year bond.

In 2006, Pakistan’s external debt was around $ 35.26 Billion, which is currently $ 74.6 Billion. Exports in 2006 were USD 18.2 and then despite Oil prices hovering around USD 75 Billion, imports bill was around USD 28 Billion.

While, lately by the end of FY 2016 Exports were mere USD 20.8. Despite USD 6-7 Billion saving/reduction in oil import bill due to sharp slide in global oil prices that averaged USD around USD 48 per barrel against, import bill amount was at alarmingly high level hitting USD 44.76 Billion marks.

Pakistani analyst/economist/columnist blaming fall in remittance as one of the factor of economic remedy caused by lower global oil prices, which is expected to drop by 2 % or roughly by $200-300 Million in the fiscal year is still likely to average around USD 19 Billion. Putting responsibility on falling remittance is nothing more than joke and sheer excuse by the critics to cover its failed policies. This is a minor cause of widening of Pakistan’s current account deficit that surged to $ 4.716 billion in 7-months (July-January).

Instead, planners should take nation into confidence and tell them about their strategies/plan that how they are handling the situation with the GCC countries, which is faced with uphill task as estimated amount of combined deficit of six-GCC states is USD 153 Billion.

Similarly, exporters are demanding depreciation of Rupee. According to decade old exchange rate trend, during this period against US Dollar, Indian Rupee lost 59 pct of its value, Japanese Yen eased by 11 pct, EURO dipped by 22 pct, Brazilian Real fell by 38 pct and Pak Rupee despite being worst performer that weakened by 75 pct failed to deliver.

Despite the luxury of depreciation at the cost of nation, export performance remained pathetic pushing prices of daily need items exorbitantly high causing sharp surge in inflation rate and making life of majority of the Pakistani’s miserable. It propelled interest rate to extraordinary heights that have ultimately pushed external debt to new highs of USD 74.6 Billion.

Here ‘s the Real Deal

Decade old falling growth trend in exports is shameful and disturbing too. It is due to fundamental weakness in overall economic policy, as tilt is one-sided towards external borrowings, only to finance loans.

Let me ask that what and how much concessions/subsidies are required to end or reduce ongoing economic woes to half the size? But, then all the beneficiaries should simultaneously give a number in writing that many jobs will be created? By how much of exports will surge and when and what will be the increase revenue collection amount?

First of all lets accept that we cannot meet and fulfill sizable order requirements, as the country produces nothing in bulk. Secondly country’s production is outdated and hence, output is low, limited storage facilities to park excess commodity/goods is also a discouraging factor. Thirdly good part of our product (food commodity) often does not meet the required global standard (quarantine) to cater demand and lastly unfortunately due to obsolete technology we cannot provide finished goods to meet international orders or buyers demand, as the economy is mostly dependent on export of raw material.

Further, due to sizable inflated growth of Domestic Market during last decade or so, which is not real in economic term, as the growth is largely caused by inflation, resulting extreme shortage of cash flow of both (Foreign Currency and Pak Rupee).

There could be lot of talk of higher economic growth, but except for agriculture and food all growth related to energy sector, vehicles, cement and telecom industry are largely import dependent.

Except for labor nothing is local and for business activity in the country, it is solely dependent on imports to meet local demand, which eating up foreign exchange. Repatriation of profit and interest payment on foreign borrowings is another big ticket item that swallows nearly USD 6 Billion annually.

Surprisingly no one is pointing this unusual growth pattern in import. Despite sharp fall in oil prices that has eased oil bill by nearly USD 6-7 Billion annually, pressure continues to mounting and is widening the trade gap.

The pressure is added as respective governments failing to impose tax on all types of income and to fill gaps is forced to impose indirect taxes to get closer to the Revenue target. Cash squeeze also inflates rising circular debt that has surged to around Rs 370 Billion. Cash shortfall over the years has pushed Domestic Debt to Rs 14.83 Trillion.

Central Bank is constantly struggling with cash flow, as it is forced to lend excess money to banks to meet liquidity shortage, which has currently risen to Rs 1.1 Trillion after December 2, 2016 low of Rs 670.8 Billion injection through its Open Market Operations (OMO) window. SBP is repeatedly funding market from its International Reserves/ Foreign Currency Liquidity and has so far utilized USD 3.6 Billion for external funding. According to SBP available data its swap book has also helped to generate Rs 377 for domestic market.

Every Governments Claim/Strategy

Past & Present government’s decade old external borrowing strategy is to float Bond or Sukuk after criticizing previous rulers. They all come up with a standardize statement boasting of impressive pricing structure, issues are always highly oversubscribed getting bigger orders than the previous ones, claiming investors high level of confidence in their economic policy, Investors that meet on the road shows often immediately place orders. On most occasions the offering is very well balanced with increased participation from Europe and USA and it goes on.

The nation is least interested in Bond/Sukuk auction and bidder’s interest and  keener to know that if the economy is robust then why External Debt continues to rise sharply at a faster pace. If the picture of economy is painted rosy, then why is the borrowing so costly and how does it help to stimulate economy? In last 10-years, despite aggressive borrowing strategy by respective governments, if the economy has rallied exceptionally then why eternal debt have doubled from USD 35.26 Billion to USD 74.6 Billion and the debt could not reduced to USD 15 Billion?

Risk of Short Term Borrowings to Meet Long Term Needs

In my November 12, 2016 note about IMF MD Christine Lagarde’s visit to Pakistan, I wrote that she surely has a purpose for large number of waivers. I clearly stated that IMF kindness has reasoning for easing conditions as creation of Asia Infrastructure Investment Bank (AIIB) and China after its CPEC partnership with Pakistan is a big threat for the donor agencies as it could be another big lending source for Pakistan.

Pakistan could now be looking towards China for short term funding to meet its long term commitment, which could be the beginning of new era of large size borrowing.

Sole purpose of short term borrowing is to reduce the cost of borrowing, to avoid high risk premium charged on long term debt. Another risk on exposed position during crisis period is that premium increases sharply and maturity mismatches could become a very expensive proposition.

Therefore, borrowing in short-term against long term commitment is technically risky proposal, as maturity gap remains exposed. In an increasing interest rate environment due to Interest Rate Exposure losses can be incurred due to adverse changes in US Interest Rate. Long term borrowing also reduces/minimize liquidity risk factor.

The idea behind short term borrowing in a rising interest trend clearly depicts that as the country is nearing election, government is playing safe as short term mismatch borrowing will firstly reduce funding cost and if present government fails to get elected the burden will fall on newly elected government.

Ideally, government can still make big headline by demanding from SBP to reduce its Target Rate and simultaneously MOF can sharply cut PIB Coupon Rate in line with inflation rate, which is unlikely to surpass 4.5 pct by end of fiscal year end. Based on calculation governments burden will be eased by nearly Rs 150-200 Billion annually. This is what is practiced around the globe to reduce its borrowing cost.

Tribune Story

https://tribune.com.pk/story/1377579/repay-eurobond-debt-pakistan-likely-borrow-750m-china/

 

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

Fraud Prevention & Risk Management

@asadcmka

In Financial markets, it has become very common now days that we often hear about financial irregularities that often pop up due to intentional/unintentional human error or for not abiding by the rules and regulations. But fraud, which happens in all types of business to gain dishonest advantage with the intent to misappropriate fund has lengthen in size.

Financial crime is caused due to unmanaged risk. Proactive approach is the key to strong risk management, which should be timely implemented/executed rather than responding to it after it has happened.

Estimates suggest criminals annually launder proceeds worth USD 1.6 Trillion and thieves defrauds size is of nearly USD 50 Billion. According to fraud facts 40 pct fraud is detected through complains, 24% by internal auditors, 21% by accident and 15% through internal set-ups causing 5 to 7 pct revenue losses. On an average, it takes nearly 2-years to discover fraud.

Some of the recent accounting scandal involves BCCI in 1991 owing Pound Sterling 10 Billion to creditors and is blamed for money laundering. In 2001, Enron got bankrupt as its shareholders lost USD 74 Billion. Scandal of USD 1.7 Billion was detected at Camera maker’s Olympus in 2011 and lately Toshiba joined the list of corporate financial scandal/casualty and is estimated to suffer write off of nearly USD 2.5.

LIBOR

In July 2012, LIBOR issue popped up after one of the former trader highlighted manipulation of Libor that according to him was going on since 1991. During investigation it was found that banks were incorrectly deflating or inflating rates to profit from trades.

Basically Libor is the benchmark average interest rate, which banks lend unsecured funds to each other on London inter-bank market after it is calculated by major member banks from across the globe after reaching a consensus.

Libor relevance is the pricing of USD 544 Trillion in Notional Amounts (BIS Report), Over the Counter (OTC) Derivative Market as of end June 2016. Then the estimated size of derivative/loan was USD 350 Billion.

Investigation of 16-Financial Institutions from 5-Countries reveled that the unfair practiced was taking placing since 2003. Some of the notable names were Royal Bank of Scotland, Rabobank, Deutsche Bank, UBS and Barclays. Riggers were fined more than USD 9 Billion in USA, UK and in EU and charged Brokers and Individual Traders. Libor is controlled by UK law through its Parliament.

In 2007-09 US financial crises were a white color crime and the fraud was committed in mortgage securitization industry by issuance of MBS and Securities that created housing bubble.

Money laundering

Dirty money or money laundering, which is huge in size estimated to be well above USD 2 Trillion is the real global problem, which is the cause of corruption and crime that leads to all sorts of wrong doings.

Imagine the total available count of notes and coins (M0) is USD 1.3 Trillion around the world, then how difficult it is to have a constant check on cash money. Latest FED data suggest Currency in Circulation is USD 1.5 Trillion.

And according to 2010 survey of Economic Blog DollarDaze out of 137 currencies traded in 167 countries the total size of notes and coins (M0) is equivalent of USD 5.2 Trillion. Total asset size of Central Banks in 2010 was nearly 11 Trillion against today’s size of USD 22 Trillion.

Scam

In latest development it is reported that Global Banks have recently handled in processing Billions of US Dollar worth of Russian cash that involves Major US and European Banks.

Organized Crime and Corruption Reporting Project (OCCRP) estimates suggest that nearly 70.000 transactions have taken place between 2011 to 2014 that paved way to shift Billions of US Dollars from Russia into the account of large  number of companies around the world.

In last couple of years large penalties were imposed on German, French and British Banks for violating money laundering laws. It is said that Moldova is involved in sizable laundering scheme of nearly USD 22 Billion helping to shift money to Eastern Europe.

Conclusion

The past failure was/is surely caused by bad governance of regulatory authorities due to culture of greed and unethical practices. The calculated liquidity risk was surely misjudged, as the market was totally illiquid when it mattered.

The decade old past events had clearly exposed the vulnerability of financial market, as its model had completely failed because the truth is that the market was at excessively high leverage levels.

Similarly, Euro-zone debt crisis was caused by high structural deficit, high interest rate environment causing expensive temporary bailout. Yes, of course the real culprit was large outflow causing imbalance. ECB’s QE policy is forcefully keeping it afloat, but the big hole still needs to be fixed.

But again I would like to warn that keep a close watch on global interest rate trend, which needs to tame down, or else confidence can once again shaken and systemic cracks could reappear.

Unfortunately, rating agencies clearly lagged behind to provide timely signal and hence, is the biggest culprits that failed to identity the problem causing sovereign debt crisis.

Surprisingly during crisis period (USA & Europe), despite wide Bond spread, rating agencies lagged behind Credit Default Swap (CDS), but CDS moves were/are too choppy to provide guidance, which cannot be taken as guideline for future market direction.

However, despite questionable debate about the timing, method and procedures adopted by the credit rating agencies, it still plays vital role in providing guideline to determine cost of funding for a sovereign borrower or a private enterprise.

Therefore,  after going through various analysis and reports, I have am of view that operating in a Domestic/Global environment, it requires different type of challenges that involves country’s social behavior, its political environment, and its trade and taxation policy, which guides future line of action.

Hence, emphasis should be on Financial Risk Management that should support and cover both the dimensions, Domestic and International, which should help in reducing overall risk substantially.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

“One More US Int/Rate Hike”

by Asad Rizvi

FED interest rate hike is quite in line of my January 02, “Outlook 2017”  https://asadcmka.wordpress.com/2017/01/02/outlook-2017-global/

As I have predicted 2- Rate Hikes in 2017. My view remains unchanged. In three months Fed has already acted twice, hence, I do not see more than one Hike this year (Dec 2017).

Fed Chairwoman’s tone was clearly Dovish, she was not looking too confident with the current pace of economic growth, probably the future growth outlook is still hazy, which requires gaining momentum.

I think impetus will largely depend on Trump’s Fiscal measures as Policy Shift, Domestic Spending and changes in Tax structure if any would greatly matter to provide acceleration. Chinese slowdown, European Economic Distress and Emerging Market Unrest could also be the hindering factor.

Although US interest rate hike is not supportive for Gold and Currencies, but both moved in opposite direction by gaining ground on short covering that was also helped by rising inflationary pressure.

Ongoing Bullish trend will not be sustainable in medium to longer term, as Yellow metal and Global currencies is likely to exhaust soon.

Interest rate hike does not encourage stock market. It also adds pressure on bond yield, which ultimately surges. But again soon after FED rate hike announcement both moved in opposite direction against market expectation.

10-year bond yield that last week tested 2.63 pct was trading notch below 2.5 pct. Interest rate hike is certainly causing yield curve to steepen. However, my 10-year bond target of 2.90 pct is still valid.

However, tendency of higher US Interest Rate occurrence will add pressure on all Economies opting for Loose Monetary Policy and Emerging Economies Risks Flight of Capital that may ultimately add pressure on its Domestic Currency.

I am expecting currencies to make some more gains before taking dip. Until next FED announcement unless Euro sees weekend close 1.0980, it is more likely to ease, but strong support lies around 1.0350 – 410 zones.

GBP needs to move above 1.2680, which looks tough and may target 1.15-1.18 zones.

While, BOJ opted for no shift in its policy rate, but do watch Japanese 10-year bond yield in medium term, which could gradually inch up by 15-30 basis point. But strong Yen may hinder such move, which needs to break 116 convincingly for 119-120, as key is 111.10 to watch.

View on Gold remains bearish as $ 1250-80 should not break for another down move. Break of $ 1150-70 levels id required for further fall, but buyers on dip will challenge sellers.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

Facts about Pakistan Economy

by Asad Rizvi

There are plenty of theories floating around about Pakistan’s economy is surging ahead and constantly moving forward.

Top Global analysts, journals, newspapers, financial service companies and banks have shown optimism about Pakistan’s economy and are predicting healthy growth mainly relying on CPEC projects (energy and strategic infrastructure). CPEC related Investments are estimated to exceed its original target of USD 46 Billion and are likely to overshoot USD 50 Billion for next 13-years.

And according to PricewaterhouseCoopers, based on projected Global GDP by Purchasing Power Parity (PPP) by 2030, Pakistan will be ranked amongst top 20 powerful economies. This is excellent news, but for better understanding and debate purpose to know the facts its projection needs to be further elaborated.

Some of the classic example of successful economies is Singapore and Hong Kong. Malaysia and South Korea are good name to add.

New Zealand with a total population of 4.6 Million works on free market principles, it has advance agriculture technology and sophisticated farming methods and have a long standing flexible exchange rate. They are now focusing on industrialization. Nordic is another classic model. But in my view, Switzerland world’s affluent economy is certainly the best.

However, it is important to note that I am not associating my article with politics, as my arguments are based on economic facts/realities.

It is true that economy flourishes and growth data surges when ample of money are dumped weather in Cash or Borrowings. Let’s take India as case study.

Its growth history suggests that since 1960 Indian exports were totally dependent on 15-nation Soviet Union (SU), but after 1991 SU collapse its economy was in dismay and was experiencing severe unrest.

While, India got another jolt as two of its major oil suppliers Iraq and Kuwait were engaged in a war that skyrocketed oil prices. Hence its major trading partners were faced with turmoil that almost destroyed its economy. With nearly USD 1.2 Billion Foreign Exchange Reserves in kitty, Indian economy was on verge of collapse.

Then India’s visionary Finance Minister Manmohan Singh was quick to impose industrial custom duty of up to 400 pct, he did not compromise on economic matters of national interest, as there was acute shortage of cash that created “Balance of Payment Crisis”.

He promptly made clever and expeditious strategic moves, as innovative and illustrious economist opted to open Western Trading Gates and today all the hard work and sacrifice paid off. Its major trading partners are USA, China and Europe.

Until 2006, India’s FDI annual growth was averaging USD 4-6 Billion. It currently enjoys hefty foreign inflow and in Fiscal Year 2016, total inflows that include (unincorporated bodies) were USD 55.5 Billion and its growth rate was 7.9 pct. Due to Demonetization, by Fiscal Year end March 2017 it is likely to dip to around 6.5 pct. Current India’s has a foreign exchange reserve is USD 361 Billion.

China is another story of extraordinary growth. It opened its gates for foreign trade and investments after implementing its free market reforms in 1979 and is enjoying the status of world’s fastest growing economy.

The key to rapid growth was emphasis and advancement in technological growth in its domestic industry. China has that has the advantage of large consumer population, started enjoying double digit growth from 1995 onwards for two-decades.

This was only possible after modernizing its infrastructure changes that included transportation, energy and telecommunications by spending over USD 250 Billion by “Y2K”.

Soon after 2008-9 Global crisis Chinese government immediately decided to inject USD 586 Billion economic stimulus package to counter turmoil. Since then it is comfortably averaging annual FDI growth of above 100 Billion and beyond. In 2015 China’s annual average FDI inflow was USD 126.7 Billion, which mildly dipped and in 2016 it inflow averaged around USD 118 Billion.

Since size of Pakistan’s economy during first 50 years was too small, for comparison sake, I am discussing Pakistan’s economic growth of last two decades. Historically against 4.5 pct average growth in 70 years, the economy from 1999 to 2008 averaged robust growth, which was comfortably grew above 6. This was possible due to hefty flow of foreign money, as inflow during this period was of nearly USD 25 Billion.

In 1999, Debt to GDP was around 82 pct that was brought down to 57 pct that surged beyond 60 pct from 2008 onwards. Exports surged from USD 7.8 Billion to USD 19.22 Billion. PSDP surged from Rs 80 Billion to Rs 550 Billion. Fx Reserves from USD 991 Million to USD 16.5 Billion. Ratio of Bank lending against Deposit to Private was above around 80 pct. Poverty rate was reduced to from 35 pct to 25 pct.

In my view some of the Pakistan’s finest statistics is stable Exchange Rate and Inflation. I give credit to Pakistan’s Central Bank for its effective management. Though some of the notable/prominent names argue for sharp depreciation, they have failed to give evidence and in number that the country will benefit from weak Rupee.

Weak Rupee is the cause high price that has made life of common man miserable. These Pundits are quick to point overvalued Rupee as cause of export sufferings, but none of them are writing lengthy articles about the strength of currencies in last 2-months as Indian Rupee recovered by 3 pct, Mexican Peso gained 5 pct, Brazilian Real gained 8 pct, AUD is up by 6 pct, Euro is strong by 2 pct, Russian Ruble made 7 pct recovery, Egyptian Pound made 8 pct recovery and Chinese Yuan is almost at par.

Similarly, Credit Suisse gave a horrible forecast about Pakistan’s economy depicting food supply constrain and since food constitutes 32 pct of the food basket, inflation will skyrocket to 5-5.5 pct by Fiscal Year end forcing SBP to hike rate sharply by 50-75 basis point.

Pakistan’s (June-January) inflation 3.85, which means based on its report Credit Suisse is expecting monthly inflation of above 7.5 pct. I do not see surge beyond 4.5 by fiscal year end.

About rate hike, with sale of Rs 8.045 Trillion worth of Government Securities and with exports down and Revenue Collection a big challenge, I doubt if hike is a strong probability. Instead I still see either hold for longer duration with possible slash of PIB Coupon rate, as there is plenty of room to ease, which will ease governments borrowing cost/burden or else. Debt to GDP will further worsen.

Further, I fully support the strategy of reducing outstanding debt of PIB’s, which helps to reduce borrowing cost. The decline in average tenure of Domestic Debt means increase in the size of T/Bills and availability of liquidity in short term, which will help Central Bank to manage yield cut offs, as large T/bills portfolio held by banks will not allow Commercial Banks to dictate pricing terms or no aggressive bidding, which also means reduction in borrowing cost and hence, decrease of burden for tax payers.

Conclusion

Countries that have large size population, has sizable demand for consumption that also lengthens its trade volume size. But this is not the only growth barometer. For a populous developing country urbanization of population is another key indicator that gives better hint about growing economy. Such economies can only prosper if there is economic development, which is closely linked with urbanization.

In the absence of urbanization policy and urban centers, Pakistan cannot attain high income level as we do not have a single business model that can turn the table. Therefore, without any business model our economic managers should not talk of young large population, as increased population density does not guarantee economic prosperity.

Hence, due to the increased size in population and consumption the size of economy is bound to grow. So there is nothing to cheer about if the size grows to 20th by year 2030 or 16th by year 2050.

CPEC funding will surely keep the wheel of economy moving. I am not sure how many MW will be added to the National grid, but electricity production will definitely increase that will inflate the oil bill too. The crux is the cost factor, as the energy investors based on equity participation will be paid 17 pct rate of return in US Dollars at agreed terms.

The big question that needs to be answered is that what will be size of economic gain in monetary terms?

Will it reduce the ongoing economic duress?

How much will the economy prosper?

Will it help to sharply reduce the poverty level ?

Will the income inequality narrow down?

Will the literacy rate improve?

Will the standard of living get better?

Will the problem of ever rising housing shortfall of 10 million units addressed and reduced or would continue to rise?

Will it help to reduce Debt to GDP Ratio?

Will it help Pakistan’s Tax Collection Ratio make sizable gain against GDP?

Will it help Pakistan’s economy to attain Budget Surplus?

Will Pakistan join as emerging market?

 

Pakistan has plenty of unresolved social issues and corruption is a thorn in the flesh. Poverty, illiteracy, health, water and housing are some of them.

The secret of success for any country is Federalism, Rule of Law, Economic Freedom and Law that Governs the Nation. Modern world is driven by innovation and we are nowhere close to reality.

There is clear global shift in economic balance between developed and emerging economies adding pressure on currencies. The prospect of further FED tightening poses significant risk to the global economies. Instability and Political uncertainty around the region is one of the major causes that hamper growth.

Therefore, I suggest our Economic Leaders and Managers to adopt realistic approach and avoid Economic Complacency and let better sense prevail.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

 

Pakistan’s External & Domestic Debt

@asadcmka
Pakistan’s Domestic and External Debt have been rising at an alarming pace with Public Debt and Liability hitting Rs 14.54 Trillion and Foreign Debt surpassing USD 74.638 Billion. Finance Minister Isaq Dar in its latest Debt Article has argued that Public External Debt as of June 2016 stood at $ 57.7 Billion.

In is recent article, FM has correctly pointed out that analysts are misinterpreting the Debt figures. It is important to understand that Domestic or Public Debt is a National Debt and is Financial Obligation incurred by all Government bodies of country, which is created by borrowings against Government Paper.

External or Foreign Debt is basically Debt that is owed by the Government to Foreigners. It needs to be paid off, though it can be rolled over as well. When bond becomes due it needs to be replaced with new bond. Here, unlike Private Sector Sovereign Governments cannot get Foreclosed, go Bankrupt and Default. It can only default when Government chose to do so. It is always increased spending that leads to Higher Debt.

But his number too is inaccurate because of time lag and for not providing complete detail about the data for remaining period that has severely impacted the Debt to GDP numbers, which questions the accuracy of his numbers.

According to available SBP Data, out of Total External Debt and Liabilities as of  1st FY17 of USD 74.638 Billion, three entries i.e., Bank Borrowings of USD 1.916 Billion, Private Sector Debt of USD 3.568 Billion and Debt Liabilities to Investors of USD 2.957 Billion is not the part of Total External Debt, which amounts to USD 66.197 Billion.

Since the data provided by FM in his article is 4-month old, it does not include increase of other liabilities or Financial Derivative from USD 1.5 Billion to USD 3 Billion arranged through inter-bank market. It neither includes further borrowings from IMF and other Donor agencies.

Hence, calculation based on SBP’s latest (Feb 03) update of National Summary Data Page the total size of GDP is Rs 29.597 Trillion and by adding latest Domestic Debt plus External Debt (USD Borrowings and Interest for Deficit Financing), total debt figure should be roughly around Rs 22 Trillion, which means DEBT to GDP is around 74 pct.

In last couple of years, despite sharp drop in oil prices that have reduced country’s oil bill by nearly USD 15 Billion Pakistan has been borrowing extensively to bolster its foreign exchange reserves and cover its domestic financing needs.

However, if we look at the history of Total Size of Pakistan Debt, in 1999 it was Rs 2.907 Trillion, in 2008 it was Rs 6.475 Trillion and in 2015 it was Rs 18.467 Trillion.

Similarly, size of interest payment in 1999 was Rs 340 Billion, in 2008 was Rs 642 Billion and in 2015 was Rs 1.284 Trillion, which is likely to surpass Rs 1.5 Trillion annually.

The cause of exorbitantly high Deficit Financing is due to Shortfall in Revenue Collection, Sharp fall in Bank Lending to Corporate Sector because of investments in Government Paper. Bank’s Deposit/Advance that has plunged to around 50 pct from the highs of 74 pct in 2007 confirms my reasoning. Damage is also caused by fall in Exports due to flawed or unhelpful export policy.

According to the Fiscal Responsibility and Debt Limitation Act of 2005 (FRDL), it restrict Pakistan public debt limit up to 60% of GDP that has sharply breached the allocated limit and hence, it is now well beyond desired manageable level for which Parliament is equally responsible for not raising its voice against this serious violation.

Bottom line is that in the absence of future debt payment plan/strategy, habit of constant Domestic and Foreign Borrowings by various elected governments is a very costly and only temporary stop gap arrangement to buy time.

My argument is based on facts and not on assumptions. I do not predict doomsday scenario, but in the absence of Debt Reduction Strategy and faced with Economic Challenges, I cannot dream of Economic Stability and Prosperity, as economic condition will remain brittle and unstable due to rapid increase in debt that leads to financial difficulties or prolong slowdown in GDP growth.

Out history suggest talking of 15 or 20 year vision is a wishful thinking, as in past even the ancient concept of 5-year plan has never worked, as it required working in tandem with global trend and economic growth. Hence, unless supported by Long Term Vision Document defining its objective in boarder term, its mere sweetener to gain prominence.

It is true that large part of debt is domestic and external is a smaller portion. But what worries most is that with the pathetic export growth trend of last 7 years and likely hike in global oil prices in next few years and growing demand for oil at home and Rising Global Interest Rates trend.

In next 5-7 years borrowing cost plus debt payment will sharply surge. Debt will comfortable surpass USD 100 Billion, which means the country will roughly require USD 6-7 Billion to pay interest, as total average cost of borrowings is comfortable above 5 pct, then how are we going to manage our balance of payment? I have not included Principle amount that will mature in between.

I don’t want to dispute governments Medium Term Debt Management Strategy (MTDS). But for record sake, in 2008 Banks Holdings of GOP Securities Rs 2 Trillion, in FY-12 it was Rs 3.364 Trillion and as of now it has surged to Rs 6.477 Trillion.

While, comparatively Bank Deposit in 2008 was Rs 3.8 Trillion against current Rs 10.7 Trillion. Bank Advance was Rs 3.271 Trillion in 2008, which is currently Rs 5.467 Trillion. With little understanding of monetary economics this will surely give readers better understanding about economy and real growth.

Therefore, managing and refining risk is borrowed strategy when global planners came up with the idea of longer maturities instead of short term rollovers to avoid frequent global turbulence that was caused by crisis is Europe.

In short, Long Term Economic and Financial Vision do not carry any weight unless endorsed by Parliament with a commitment that changes can only be applied after obtaining Parliaments vote.

To meet sustainable goal any such vision is also required documentary evidence of draft approval of sub-targets that should include Defence and Internal Security Spending.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).

http://fp.brecorder.com/2016/03/2016032228030/

“Outlook 2017” Global

@asadcmka
by Asad Rizvi

The year ended in a mixed note giving jitters across the world upsetting majority of the political commentators, financial leaders, analyst and forecasters by proving them wrong. Some of the notable events of the year were BREXIT, Trump’s Election Victory and Indian Rupee Note Demonetization.

Decade old, Euro-zone’s economic crisis too is lingering on and it has not been reduced by any means. Its Unemployment Rate of 10.2 pct is still more than twice of the US Employment rate. To avoid collapse, they have to constantly offer bailout program and have to mostly opt for a rollover with longer maturities to buy more time.

Liquidity condition in Euro-zone area remains very tight. Its Banking System has a tough task ahead, which will requires funding of around Euro 200 Billion (plus) to meet the liquidity implementation requirements known as (Basel 111), Net Stable Funding Ratio by Jan 01, 2019.

To maintain stability, ECB keeps on unveiling fresh stimulus frequently that exposes its claim of economic recovery/stability.

There is a huge perception that after invoking Article 50, exit of BREXIT will begin that could bring trade restriction. It could bring more misery and volatility in the European region/UK, unless they make some sort of arrangement or reach an understanding to sort out their differences.

Indications are becoming obvious that market has exaggerated opinion on both the issues, on Trump’s Election Victory and has over reacted to UK’s referendum decision to leave European Union.

The worrying factor for all those showing concern/uneasiness is because of the changing trend in Global Political and Financial Markets. It is evident that the beneficiaries are fearful of being deprived of gifted opportunities caused by the friendlier loose monetary and fiscal policies.

These unexplained beneficiaries have sensed that like past they may not enjoy stimulus package anymore, as all indicators are pointing that the future fiscal/monetary packages will no more be as cheap and friendly. Neither will it be according to the wishes of these elite minorities.

Though Global Financial system is looking stable, supported by unorthodox methods and creative accounting, but they are not alternative answer to the problems that require regular mending to hang on, as they are not permanent solutions.

The Global Economic Nuisance is due to wide Income and Expense Gap that needs to be filled with genuine cash money instead of relying on borrowed money. This is why in last 10-years injection through QE policy inflated Balance Sheets of Major Central Banks from USD 6 Trillion (2007) to USD 18 Trillion (Current) and yet Major Economies are struggling because good part of funding is allocated for structuring of troubled banks balance sheets instead of lending to corporate sector.

Recent shift in the pattern of thinking/approach of general public/voters is linked to growing inequality, which is spreading the protectionist approach worldwide. This pattern will stretch and will likely spread beyond, unless there is a complete shift in the attitude to counter challenges and narrow the cracks.

For Developed Economies attaining desirable level of growth will remain a big challenge for the financial sector market, as uneasiness will prevail unless there is clarity of macroeconomic policy guideline.

Some uncertainty will be reduced after triggering of Article 50 and Trump’s economic policy announcement that may provide clearer economic direction.

Tendency of Higher US Interest Rate phenomena will add pressure on number of Developed Economies opting for Ultra Loose Monetary Policy and Developing and Emerging Economies risks Flight of Capital. Shifting of Assets will always be a high prospect, as prices falls and when there is a rising interest rate trend that will add further pressure on its domestic currency.

Therefore, in all probability the decade old ongoing global tepid economic growth trend is likely to stretch for few more years.

Meanwhile, I will take clue from weak Chinese bond market suggesting liquidity stress and if it sooner decides to target asset bubble, which means BOC will opt for tightening and this will slowdown its economy, hence growth beyond 6.4 pct look tough.

Brent OIL @ $ 56.85 & WTI @ $ 53.85 = Opec & Non Opec members should not become too complacent about oil prices by projecting stability around $ 60-70 levels, as US Shale Oil is already responding to higher oil prices. US Rig count is already on the up growing steadily.

Oversupply will once again dominate against all odds. But strong US Dollar will be the depressing factor that should not be ignored, as pricing is Dollar based. Hence, Brent Oil is expected to average around & 52-55 and WIT will remain a notch below.

India’s demonization strategy to clamp down black money hoarders will have severe impact on its economy, as risk is likely to spread from external shock due to rising US Interest Rates and higher oil prices. Its remittances are likely to dip around USD 70 billion or below and exports may take a bite. The overall impact will be 1-3 pct decline on its GDP and Rupee will weaken by 3-5 pct.

While, Economies of Asian zones will remain under stress, as rising US Interest Rate trend can give shiver to the Asian market, as nearly three quarter of bonds are priced in US Dollar, which risks flight of capital.

ECONOMIC DATA PROJECTION 

FED Rate 0.75 pct = Looking for Two Hikes

US 10-Year Bond @ 2.445 pct = Target 2.90 pct

EURO @ 1.0480 = ECB policy and US Interest Rate will guide Euro, if 1.0050 survives then 1.10-12 zones will be test or else 0.9780

GBP @ 1.2284 = Choppy trade expected, on the dip if 1.1550 holds upside test of 1.27-29 is a good possibility or else 1.1040

JPY @ 117.30 = Likely to hold around 122 or else 125, break of 108 is required       for 102.

Chinese growth unlikely to move beyond 6.4 pct

Chinese Yuan @ 6.9429 = Target 7.25

Indian Growth Rate between 5 pct – 6 pct

Indian Rupees @ 68.13= To weaken by 2-4 pct

Brent OIL @ $ 56.85 & WTI @ $ 53.85 = Average around & 52-55 and WIT will remain a notch below.

GOLD @ $ 1150 = US Interest Rate pressure and low demand will add pressure on Gold $ 1260 should hold. Break of $ 990-1000 physiological, will further push Gold down towards $ 880. But buyers on dip will often pop up.

 (Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

==============

“Outlook 2017”

PAKISTAN OUTLOOK

This year Pakistan will be engulfed by an election fever. On the economic front, PML (N) government on completion of its 42 month period (December 2017) has averaged GDP growth of 4 pct (plus).

At its current pace, by the end of Fiscal Year 2016-17 Pakistan’s economy will miss its original growth rate target of 5.7 pct and may settle around 5.25 pct, which should be reasonable.

In next two quarters (July-Dec 2017) I am expecting the economy should get further boost and should hit growth rate of 5.35 pct or beyond. This means that on completion of PML (N) 5-year term the economy on an average is likely to grow at around 4.50 pct. Its predecessor (PPP) during its 5-year rule attained average growth rate of 3.10 pct.

In calendar year 2017, despite few odds, indications are pointing towards continuation of robust growth, as all out efforts will be made to leap forward because of the election year ahead. CPEC should be the major contributor.

Though Pakistan is done with three-year IMF program, but it is still under obligation to submit report regularly on six-monthly basis for next three-years for review purpose to confirm continuation of compliance of its specified economic reform program.

However, ruling party is comfortably placed and due to 2018 elections, it will not hesitate to take liberty to borrow excess fund. Hence, excessive role of “Fiat Money” will be witnessed that should provide cutting edge to the fiscal authorities, as they look poised to win another term.

A brief look at the economic plan will suggest that the ongoing spending of mix and match trend will have no stopping because opposition parties did not show their intention or economic sense to counter or prevent breach of limits, rules and regulations.

Neither have they ever made a serious effort to debate or pass series of legislation in parliament voicing their concern against economic disparity to support the lowest income category.

POLICY/DISCOUNT RATE & INFLATION =

Though in last couple of years, Pakistan’s Central Bank has played vital role in managing exchange rate and inflation/policy rate that has largely helped in stabilizing the market, SBP should relook and reconsider designing its policy rate strategy by effectively using its monetary tool. SBP should also demand strong Fiscal support, as the nation is already paying a very price to Finance country’s Debt (External & Domestic), which is not sustainable due to numerous unfavorable factors.

In its July 2016 Policy announcement, SBP targeted FY 17 CPI inflation between 4.5 pct to5.5 pct, which was further revised upward, as SBP’s latest report says they are expecting CPI inflation to remain within 6 pct target.

At the end of two quarters of FY 17, it is proving to be inaccurate assessment. Based on 5-months, inflation averaged 3.92 pct, it can safely be said that in the FY 17 end CPI inflation will close well below its July target level.

Despite continued low inflation rate era, SBP leaned towards cautious approach and in my view delayed rate cuts, which was one of the major reason for BENING Fiscal Policy Stance that offered High Return in Government Securities (PIB Yields and Coupons) that has caused excessive burden on exchequer resulting sharp increase in the size of Debt and it’s financing.

However, I do not see rising oil price a real threat to Pakistan’s economy, which can potentially gain another $ 5-7 before exhausting. Oil cost is likely to average below $ 55 levels in 2017.

Hence, I am not expecting inflation to make a big stride unless Domestic Oil prices are raised sharply, which will not happen as we approach elections. In fact my bet is that first a small up move, then cut in Domestic Petrol price, as oil on international market will gradually ease, which will be election gimmick.

Further, high storage of global food stocks in record volume indicates prices will remain lower. China poses a big threat/risk to all the commodity exporting countries, as it holds huge stock of major Agri-based commodities and if it decides to release its stock, global wheat, cotton and sugar prices will once again come under severe pressure.

In Pakistan too stocks are enough to cater the needs and unless there is extreme weather condition, crop production should not be a matter of concern. Instead support price factor will continue to haunt the government for its continuous dysfunctional behavior due excess food supply, lack of storage facilities and falling commodities prices around the globe will add to the unplanned support price misery.

Therefore, based on my calculation, in all probability inflation should not be a threat in remaining 4-quarters of calendar year 2017, which is unlikely to surge beyond 4.25 pct by the end of June and should comfortably stay around 4.80 pct by the end of December 2017.

DEBT & DEBT FINANCING =

Lack of vision/effort to counter odds is causing severe financial constrain on the National Kitty for which government is paying a very high price through expensive borrowings.

Ongoing Global Mess is evident that Economic Survival on External and Domestic Borrowings is only a makeshift arrangement and is temporary that repeatedly burst. If this strategy becomes a habit then it ultimately becomes hazardous that can turn into disaster.

Higher growth rate does not guarantee higher exports and higher tax collection or higher earnings. If we take a look at overall pattern of 42-month period growth graph of present regime, the trend shows GDP growth is constantly on the uptick, but Debt to GDP ratio has been worsening breaching the FRDL debt limit. Sharp Surge in Debt is more alarming, which also gives better sense of the all around performance of the economy.

Therefore, slowdown of Exports and poor Tax Collection environment, which is a reality, will never meet its expectation, which is forcing economy to borrow. Cost reduction therapy, is the immediate remedy, which suits Pakistan’s economy.

It can easily be done by further Slashing of Policy/Discount Rates and simultaneously by Lowering PIB Yields and Coupon Rate in line with inflation rate, which can be in a straight line or Flat Yield Curve. It is a cost free opportunity, which the economy is not capitalizing that will give relief to the exchequer by nearly Rs 300-400 Billion annually.

It is all about willingness (Monetary & Fiscal Policy) to assist the economy and to obtain best result. Central Bank will have to effectively use its monetary tool by further lowering of SBP Repo Rate (floor rate) of the corridor that will give much need boost to economy. Banks will start supporting the Domestic Economy by funding corporations through Private Sector Lending.

If Policy Rates, PIB Yields and Coupon Rates are substantially reduced, the overall impact will be tremendous, as increased Bank Lending will energize economic activity that will also give much need boost to increase Revenue Collection and job condition will improve resulting another Rs 300-400 Billion gains depending on the size.

While, unchanged or End of Easy Policy Rate and unaltered Fiscal Stance will deteriorate economic condition, as Cost of External and Domestic Borrowings will start causing damage to all the SBP’s good work. Current Account Deficit will worsen due to lower Exports earnings and Government Borrowings and Bank Investments in Government Securities will increase sharply to meet funding needs. Pressure will further mount on SBP Rupee/US Dollar Swaps. Circular Debt and Currency in Circulation are two other unforgettable bleeding entries.

Therefore, ideal strategy is that before the monster raises its head “ Try To Nip It In The Bud” so that borrowing cost is manageable. If it is left unchecked, severe impact will be felt in later 2-half’s of FY 18 and in Calendar year 2018.

EXCHANGE RATE Rs/USD @ 104.61

Exchange rate has many dimensions and can be viewed differently in two different countries because of economic factors that may differ from one another.

In Asian and in Emerging market economies, since 2009 ample of cheap money were made available due to ultra loose monetary policy stance adopted by Global Central Banks.

Recently, after US Dollar gaining strength and Interest Rate inching up, conditions have changed causing Flight of Capital, which is mounting pressure on local currencies fearing tightening due to shift in high yielding USD denominated asset.

In Asia, commodity exporting such as Malaysia, Indonesia, Thailand and India or Brazil in South America and Nigeria, Zambia and Ghana in Africa, as all countries are faced with huge risk because of the burden of debt service cost, which potentially affects economic growth.

Pakistan’s exchange policy is appropriate and is well managed by SBP. Based on FY June 2015 USD FX Reserves of USD 13.5 Billion Net FX Reserves with SBP that has surged to USD 18.1 Billion, by end of FY 2016 which is USD 18.3 Billion (current) what is the justification for weak Rupee?

It’s the poor Export policy, which needs to be corrected. Our Food Commodity Policy is very embarrassing. First producers get pat on their back in the name of Support Price, which since last half a decade is higher than the international market price, so they are unable to sell abroad because they cannot match the price, and hence exporters are blessed with 20-25 pct rebate to match the international market price.

Similarly Cotton industry carries a long list of grievances. Refund is their genuine demand, which is 18 pct of the total annual export. But the industry or the critics never uttered a word about the biggest incentive they are enjoying due to sharp slash of 7 pct in Export Finance Rate, which is down to 3 pct from 10 pct on January 01, 2011.

Combining two Export products, Food (USD 3.7 Billion) and Textile USD 12.75 Billion) the estimated size of Export is USD 16.45 Billion against Pakistan’s total export of USD 22 Billion.

Hence, depreciation of Pak Rupee is not the answer to low export growth. Since the country has nothing much to offer. Instead structural changes are required to create demand for Pakistani products. Therefore, modernization and complete overhauling of the industry is necessary to meet the required standard.

Like past, the cost of Depreciation will be very high without any guaranteed economic gain, it will cause more economic misery, as cost of debt that will also push inflation sharply higher.

However in calendar year 2017, pressure on Rupee will exert if 105 level surrenders, then Rupee could weaken by 2 pct.

CLOSING REMARKS

From economic perspective this is a challenging year for Pakistan, as the country will soon be approaching elections. The task ahead is daunting, as Oil prices are on the up, Exports have declined due to weakness in Export and Crop Policies, Tax Collection target remains a big challenge, FDI has fallen and Remittances growth has slowed down.

While, Debt (Domestic & External) is constantly piling up and the Source of its Financing is Borrowings and not Income, which is very disturbing. Circular debt remains a matter of concern.

Trend of Private Sector Bank Lending is alarming and extremely disappointing. As against Bank’s Deposit of Rs 10.66 Trillion, Investment of Rs 6.274 Trillion by Schedule Banks is in GOP Securities, which is a threatening, whereas Bank Lending to Private Sector is Rs 5.3 Trillion.

Here, I would like to share my past experience and let my readers understand that government can win another term.

In March 2008, I was Anchoring a LIVE TV Talk show “MONEY MATTERS” on AAJ Tv and during my talk show with the then Federal Caretaker Finance Minister, I asked him the reason for his unpopular economic stance that surly was the cost his PML (Q) government had to pay, as they lost the elections.

It was because the then Caretaker FM sharply slashed food and energy subsidy giving jolt to poor voting community. Petroleum prices was sharply hiked by nearly 15-20 pct. In a span of 6-months Pak Rupee lost 14 pct of its value against USD to hit highs of 69.70 in May 2008. This was one of the major causes that were never discussed that had easily toppled PML (Q).

I did ask Caretaker FM about the awkward timing of his decision to hike prices, as elections is knocking at the door and I clearly told him that prior to elections prices are eased by the ruling parties to obtain soft votes and you are doing just the opposite. I did convey that you can easily win the elections by reducing prices of Ghee, Atta, Sugar, Transportation and Electricity. Depreciation of Pak Rupee will have severe impact on prices, as it will hit inflation.

He was confident about his aggressive decision/act and was probably too sure that PML (Q) will win the election with ease. He was rather doing early homework for IMF loan without realizing the cost of his adventurism.

And in my view, this was one of the major causes of PML (Q) getting wiped out. This economic blunder was never been pointed out.

I think PML (N) government is smart and I do not expect them to make such blunder as they are comfortable placed. They will probably make best use of the opportunity.

Parting with IMF was the initial strategy that given them enough space to move freely. This is why in its first major move despite sharp hike in oil prices in the international market government has decided not to increase petroleum prices, hinting more such relief measures in coming months until elections to give comfort to the common man.

Now, ruling party has the required space to breath. They are expected to provide further relief and easy conditions to the general public, which may disturb economic numbers. But it will not be a matter of concern.

Hence, Rupee may remain stable with chances of minor downward adjustment possible, as all eyes will be on regional currencies for direction. I do not see big jump in energy prices (Petrol, Electricity & Gas Bill).

Inflation will not be a threat and is manageable. I will not be surprised to see further rate cut and sharp cut of PIB Coupon rate that will reduce financing cost and Bank lending to Private Sector could surge, which suits the government perfectly.

Since any costly move will be risky affair for the ruling government due to coming elections, hence, with determination to win next term, I am expecting PML (N) to play its card effectively and will make calculated moves.

GDP GROWTH RATE = 5.25 % (Jan-June 2017 ) = 5.35 % (July – Dec 2017)

INFLATION RATE = 4.25% (Jan – June 2017) = 4.80% (July – Dec 2017 )

SBP TARGET RATE = I do not see hike in Target Rate and I will not be surprised to see 25-50 basis point cut.

PKR/USD @ 104.80 = Could weaken by 1 pct to 2 pct

PIB YIELD = Expecting Downward adjustment ranging between 50-150 basis point as it will reduce borrowing cost and provide some breathing space. Minor reduction will not give respite and will substantially increase the burden due to growing size of debt.

FISCAL DEFICIT = Will miss Target 3.8 pct and will hit 4 pct or beyond (It does not include Circular Debt).

REMITTANCES = In Calendar year 2017, I do not see big fall in remittances, in later two half of FY 17 (Jan-June) flow will surge beyond USD 9.7 Billion. However, in remaining two months of July-Dec 2017, remittances may struggle to attain 9.5 Billion levels, but is likely to hit USD 19 Billion in four quarters of 2017.

TAX COLLECTION = Target Rs 3.621 Trillion will be missed.

DEBT SERVICING COST = Will surpass Rs 1.5 Trillion.

PSX @ 47,806 = Range 42.000 to 53.000. Likely to hit upside, but I am not ruling out large correction.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

“Outlook 2017” PAKISTAN

@asadcmka
by Asad Rizvi

Pakistan will be engulfed by an election fever. On the economic front, PML (N) government on completion of its 42 month period (December 2017) has averaged GDP growth of 4 pct (plus).

At its current pace, by the end of Fiscal Year 2016-17 Pakistan’s economy will miss its original growth rate target of 5.7 pct and may settle around 5.25 pct, which should be reasonable.

In next two quarters (July-Dec 2017) I am expecting the economy should get further boost and should hit growth rate of 5.35 pct or beyond. This means that on completion of PML (N) 5-year term the economy on an average is likely to grow at around 4.50 pct. Its predecessor (PPP) during its 5-year rule attained average growth rate of 3.10 pct.

In calendar year 2017, despite few odds, indications are pointing towards continuation of robust growth, as all out efforts will be made to leap forward because of the election year ahead. CPEC should be the major contributor.

Though Pakistan is done with three-year IMF program, but it is still under obligation to submit report regularly on six-monthly basis for next three-years for review purpose to confirm continuation of compliance of its specified economic reform program.

However, ruling party is comfortably placed and due to 2018 elections, it will not hesitate to take liberty to borrow excess fund. Hence, excessive role of “Fiat Money” will be witnessed that should provide cutting edge to the fiscal authorities, as they look poised to win another term.

A brief look at the economic plan will suggest that the ongoing spending of mix and match trend will have no stopping because opposition parties did not show their intention or economic sense to counter or prevent breach of limits, rules and regulations.

Neither have they ever made a serious effort to debate or pass series of legislation in parliament voicing their concern against economic disparity to support the lowest income category.

POLICY/DISCOUNT RATE & INFLATION =

Though in last couple of years, Pakistan’s Central Bank has played vital role in managing exchange rate and inflation/policy rate that has largely helped in stabilizing the market, SBP should relook and reconsider designing its policy rate strategy by effectively using its monetary tool. SBP should also demand strong Fiscal support, as the nation is already paying a very price to Finance country’s Debt (External & Domestic), which is not sustainable due to numerous unfavorable factors.

In its July 2016 Policy announcement, SBP targeted  FY 17 CPI inflation between 4.5 pct to5.5 pct, which was further revised upward, as SBP’s latest report says they are expecting CPI inflation to remain within 6 pct target.

At the end of two quarters of FY 17, it is proving to be inaccurate assessment. Based on 5-months, inflation averaged 3.92 pct, it can safely be said that in the FY 17 end CPI inflation will close well below its July target level.

Despite continued low inflation rate era, SBP leaned towards cautious approach and in my view delayed rate cuts, which was one of the major reason for BENING Fiscal Policy Stance that offered High Return in Government Securities (PIB Yields and Coupons) that has caused excessive burden on exchequer resulting sharp increase in the size of Debt and it’s financing.

However, I do not see rising oil price a real threat to Pakistan’s economy, which can potentially gain another $ 5-7 before exhausting. Oil cost is likely to average below $ 55 levels in 2017.

Hence, I am not expecting inflation to make a big stride unless Domestic Oil prices are raised sharply, which will not happen as we approach elections. In fact my bet is that first a small up move, then cut in Domestic Petrol price, as oil on international market will gradually ease, which will be election gimmick.

Further, high storage of global food stocks in record volume indicates prices will remain lower. China poses a big threat/risk to all the commodity exporting countries, as it holds huge stock of major Agri-based commodities and if it decides to release its stock, global wheat, cotton and sugar prices will once again come under severe pressure.

In Pakistan too stocks are enough to cater the needs and unless there is extreme weather condition, crop production should not be a matter of concern. Instead support price factor will continue to haunt the government for its continuous dysfunctional behavior due excess food supply, lack of storage facilities and falling commodities prices around the globe will add to the unplanned support price misery.

Therefore, based on my calculation, in all probability inflation should not be a threat in remaining 4-quarters of calendar year 2017, which is unlikely to surge beyond 4.25 pct by the end of June and should comfortably stay around 4.80 pct by the end of December 2017.

DEBT & DEBT FINANCING =

Lack of vision/effort to counter odds is causing severe financial constrain on the National Kitty for which government is paying a very high price through expensive borrowings.

Ongoing Global Mess is evident that Economic Survival on External and Domestic Borrowings is only a makeshift arrangement and is temporary that repeatedly burst. If this strategy becomes a habit then it ultimately becomes hazardous that can turn into disaster.

Higher growth rate does not guarantee higher exports and higher tax collection or higher earnings. If we take a look at overall pattern of 42-month period growth graph of present regime, the trend shows GDP growth is constantly on the uptick, but Debt to GDP ratio has been worsening breaching the FRDL debt limit. Sharp Surge in Debt is more alarming, which also gives better sense of the all around performance of the economy.

Therefore, slowdown of Exports and poor Tax Collection environment, which is a reality, will never meet its expectation, which is forcing economy to borrow. Cost reduction therapy, is the immediate remedy, which suits Pakistan’s economy.

It can easily be done by further Slashing of Policy/Discount Rates and simultaneously by Lowering PIB Yields and Coupon Rate in line with inflation rate, which can be in a straight line or Flat Yield Curve. It is a cost free opportunity, which the economy is not capitalizing that will give relief to the exchequer by nearly Rs 300-400 Billion annually.

It is all about willingness (Monetary & Fiscal Policy) to assist the economy and to obtain best result. Central Bank will have to effectively use its monetary tool by further lowering of SBP Repo Rate (floor rate) of the corridor that will give much need boost to economy. Banks will start supporting the Domestic Economy by funding corporations through Private Sector Lending.

If Policy Rates, PIB Yields and Coupon Rates are substantially reduced, the overall impact will be tremendous, as increased Bank Lending will energize economic activity that will also give much need boost to increase Revenue Collection and job condition will improve resulting another Rs 300-400 Billion gains depending on the size.

While, unchanged or End of Easy Policy Rate and unaltered Fiscal Stance will deteriorate economic condition, as Cost of External and Domestic Borrowings will start causing damage to all the SBP’s good work. Current Account Deficit will worsen due to lower Exports earnings and Government Borrowings and Bank Investments in Government Securities will increase sharply to meet funding needs. Pressure will further mount on SBP Rupee/US Dollar Swaps. Circular Debt and Currency in Circulation are two other unforgettable bleeding entries.

Therefore, ideal strategy is that before the monster raises its head “ Try To Nip It In The Bud” so that borrowing cost is manageable. If it is left unchecked, severe impact will be felt in later 2-half’s of FY 18 and in Calendar year 2018.

EXCHANGE RATE Rs/USD @ 104.61

Exchange rate has many dimensions and can be viewed differently in two different countries because of economic factors that may differ from one another.

In Asian and in Emerging market economies, since 2009 ample of cheap money were made available due to ultra loose monetary policy stance adopted by Global Central Banks.

Recently, after US Dollar gaining strength and Interest Rate inching up, conditions have changed causing Flight of Capital, which is mounting pressure on local currencies fearing tightening due to shift in high yielding USD denominated asset.

In Asia, commodity exporting such as Malaysia, Indonesia, Thailand and India or Brazil in South America and Nigeria, Zambia and Ghana in Africa, as all countries are faced with huge risk because of the burden of debt service cost, which potentially affects economic growth.

Pakistan’s exchange policy is appropriate and is well managed by SBP. Based on FY June 2015 USD FX Reserves of USD 13.5 Billion Net FX Reserves with SBP that has surged to USD 18.1 Billion, by end of FY 2016 which is USD 18.3 Billion (current) what is the justification for weak Rupee?

It’s the poor Export policy, which needs to be corrected. Our Food Commodity Policy is very embarrassing. First producers get pat on their back in the name of Support Price, which since last half a decade is higher than the international market price, so they are unable to sell abroad because they cannot match the price, and hence exporters are blessed with 20-25 pct rebate to match the international market price.

Similarly Cotton industry carries a long list of grievances. Refund is their genuine demand, which is 18 pct of the total annual export. But the industry or the critics never uttered a word about the biggest incentive they are enjoying due to sharp slash of 7 pct in Export Finance Rate, which is down to 3 pct from 10 pct on January 01, 2011.

Combining two Export products, Food (USD 3.7 Billion) and Textile USD 12.75 Billion) the estimated size of Export is USD 16.45 Billion against Pakistan’s total export of USD 22 Billion.

Hence, depreciation of Pak Rupee is not the answer to low export growth. Since the country has nothing much to offer. Instead structural changes are required to create demand for Pakistani products. Therefore, modernization and complete overhauling of the industry is necessary to meet the required standard.

Like past, the cost of Depreciation will be very high without any guaranteed economic gain, it will cause more economic misery, as cost of debt that will also push inflation sharply higher.

However in calendar year 2017, pressure on Rupee will exert if 105 level surrenders, then Rupee could weaken by 2 pct.

CLOSING REMARKS

From economic perspective this is a challenging year for Pakistan, as the country will soon be approaching elections. The task ahead is daunting, as Oil prices are on the up, Exports have declined due to weakness in Export and Crop Policies, Tax Collection target remains a big challenge, FDI has fallen and Remittances growth has slowed down.

While, Debt (Domestic & External) is constantly piling up and the Source of its Financing is Borrowings and not Income, which is very disturbing. Circular debt remains a matter of concern.

Trend of Private Sector Bank Lending is alarming and extremely disappointing. As against Bank’s Deposit of Rs 10.66 Trillion, Investment of Rs 6.274 Trillion by Schedule Banks is in GOP Securities, which is a threatening, whereas Bank Lending to Private Sector is Rs 5.3 Trillion.

Here, I would like to share my past experience and let my readers understand that government can win another term.

In March 2008, I was Anchoring a LIVE TV Talk show “MONEY MATTERS” on AAJ Tv and during my talk show with the then Federal Caretaker Finance Minister, I asked him the reason for his unpopular economic stance that surly was the cost his PML (Q) government had to pay, as they lost the elections.

It was because the then Caretaker FM sharply slashed food and energy subsidy giving jolt to poor voting community. Petroleum prices was sharply hiked by nearly 15-20 pct. In a span of 6-months Pak Rupee lost 14 pct of its value against USD to hit highs of 69.70 in May 2008. This was one of the major causes that were never discussed that had easily toppled PML (Q).

I did ask Caretaker FM about the awkward timing of his decision to hike prices, as elections is knocking at the door and I clearly told him that prior to elections prices are eased by the ruling parties to obtain soft votes and you are doing just the opposite. I did convey that you can easily win the elections by reducing prices of Ghee, Atta, Sugar, Transportation and Electricity. Depreciation of Pak Rupee will have severe impact on prices, as it will hit inflation.

He was confident about his aggressive decision/act and was probably too sure that PML (Q) will win the election with ease. He was rather doing early homework for IMF loan without realizing the cost of his adventurism.

And in my view, this was one of the major causes of PML (Q) getting wiped out. This economic blunder was never been pointed out.

I think PML (N) government is smart and I do not expect them to make such blunder as they are comfortable placed. They will probably make best use of the opportunity.

Parting with IMF was the initial strategy that given them enough space to move freely. This is why in its first major move despite sharp hike in oil prices in the international market government has decided not to increase petroleum prices, hinting more such relief measures in coming months until elections to give comfort to the common man.

Now, ruling party has the required space to breath. They are expected to provide further relief and easy conditions to the general public, which may disturb economic numbers. But it will not be a matter of concern.

Hence, Rupee may remain stable with minor chances of downward adjustment possible, as all eyes will be on regional currencies for direction. I do not see big jump in energy prices (Petrol, Electricity & Gas Bill).

Inflation will not be a threat and is manageable. I will not be surprised to see further rate cut and sharp cut of PIB Coupon rate that will reduce financing cost and Bank lending to Private Sector could surge, which suits the government perfectly.

Since any costly move will be risky affair for the ruling government due to coming elections, hence, with determination to win next term, I am expecting PML (N) to play its card effectively and will make calculated moves.

GDP GROWTH RATE =  5.25 % (Jan-June 2017 ) = 5.35 % (July – Dec 2017)

INFLATION RATE = 4.25% (Jan – June 2017) = 4.80% (July – Dec 2017 )

SBP TARGET RATE = I do not see hike in Target Rate and I will not be surprised to see 25-50 basis point cut.

PKR/USD @ 104.80 = Could weaken by 1 pct to 2 pct

PIB YIELD = Expecting Downward adjustment ranging between 50-150 basis point as it will reduce borrowing cost and provide some breathing space. Minor reduction will not give respite and will substantially increase the burden due to growing size of debt.

FISCAL DEFICIT = Will miss Target 3.8 pct and will hit 4 pct or beyond (It does not include Circular Debt).

REMITTANCES = In Calendar year 2017, I do not see big fall in remittances, in later two half of FY 17 (Jan-June) flow will surge beyond USD 9.7 Billion. However, in remaining two months of July-Dec 2017, remittances may struggle to attain 9.5 Billion levels, but is likely to hit USD 19 Billion in four quarters of 2017.

TAX COLLECTION = Target Rs 3.621 Trillion will be missed.

DEBT SERVICING COST = Will surpass Rs 1.5 Trillion.

PSX @ 47,806 = Range 42.000 to 53.000. Likely to hit upside, but I am not ruling out large correction.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

 

“Outlook 2017” Global

January 2, 2017

@asadcmka
by Asad Rizvi

The year ended in a mixed note giving jitters across the world upsetting majority of the political commentators, financial leaders, analyst and forecasters by proving them wrong. Some of the notable events of the year were BREXIT, Trump’s Election Victory and Indian Rupee Note Demonetization.

Decade old, Euro-zone’s economic crisis too is lingering on and it has not been reduced by any means. Its Unemployment Rate of 10.2 pct is still more than twice of the US Employment rate. To avoid collapse, they have to constantly offer bailout program and have to mostly opt for a rollover with longer maturities to buy more time.

Liquidity condition in Euro-zone area remains very tight. Its Banking System has a tough task ahead, which will requires funding of around Euro 200 Billion (plus) to meet the liquidity implementation requirements known as (Basel 111), Net Stable Funding Ratio by Jan 01, 2019.

To maintain stability, ECB keeps on unveiling fresh stimulus frequently that exposes its claim of economic recovery/stability.

There is a huge perception that after invoking Article 50, exit of BREXIT will begin that could bring trade restriction. It could bring more misery and volatility in the European region/UK, unless they make some sort of arrangement or reach an understanding to sort out their differences.

Indications are becoming obvious that market has exaggerated opinion on both the issues, on Trump’s Election Victory and has over reacted to UK’s referendum decision to leave European Union.

The worrying factor for all those showing concern/uneasiness is because of the changing trend in Global Political and Financial Markets. It is evident that the beneficiaries are fearful of being deprived of gifted opportunities caused by the friendlier loose monetary and fiscal policies.

These unexplained beneficiaries have sensed that like past they may not enjoy stimulus package anymore, as all indicators are pointing that the future fiscal/monetary packages will no more be as cheap and friendly. Neither will it be according to the wishes of these elite minorities.

Though Global Financial system is looking stable, supported by unorthodox methods and creative accounting, but they are not alternative answer to the problems that require regular mending to hang on, as they are not permanent solutions.

The Global Economic Nuisance is due to wide Income and Expense Gap that needs to be filled with genuine cash money instead of relying on borrowed money. This is why in last 10-years injection through QE policy inflated Balance Sheets of Major Central Banks from USD 6 Trillion (2007) to USD 18 Trillion (Current) and yet Major Economies are struggling because good part of funding is allocated for structuring of troubled banks balance sheets instead of lending to corporate sector.

Recent shift in the pattern of thinking/approach of general public/voters is linked to growing inequality, which is spreading the protectionist approach worldwide. This pattern will stretch and will likely spread beyond, unless there is a complete shift in the attitude to counter challenges and narrow the cracks.

For Developed Economies attaining desirable level of growth will remain a big challenge for the financial sector market, as uneasiness will prevail unless there is clarity of macroeconomic policy guideline.

Some uncertainty will be reduced after triggering of Article 50 and Trump’s economic policy announcement that may provide clearer economic direction.

Tendency of Higher US Interest Rate phenomena will add pressure on number of Developed Economies opting for Ultra Loose Monetary Policy and Developing and Emerging Economies risks Flight of Capital. Shifting of Assets will always be a high prospect, as prices falls and when there is a rising interest rate trend that will add further pressure on its domestic currency.

Therefore, in all probability the decade old ongoing global tepid economic growth trend is likely to stretch for few more years.

Meanwhile, I will take clue from weak Chinese bond market suggesting liquidity stress and if it sooner decides to target asset bubble, which means BOC will opt for tightening and this will slowdown its economy, hence growth beyond 6.4 pct look tough.

Brent OIL @ $ 56.85 & WTI @ $ 53.85 = Opec & Non Opec members should not become too complacent about oil prices by projecting stability around $ 60-70 levels, as US Shale Oil is already responding to higher oil prices. US Rig count is already on the up growing steadily.

Oversupply will once again dominate against all odds. But strong US Dollar will be the depressing factor that should not be ignored, as pricing is Dollar based. Hence, Brent Oil is expected to average around & 52-55 and WIT will remain a notch below.

India’s demonization strategy to clamp down black money hoarders will have severe impact on its economy, as risk is likely to spread from external shock due to rising US Interest Rates and higher oil prices. Its remittances are likely to dip around USD 70 billion or below and exports may take a bite. The overall impact will be 1-3 pct decline on its GDP and Rupee will weaken by 3-5 pct.

While, Economies of Asian zones will remain under stress, as rising US Interest Rate trend can give shiver to the Asian market, as nearly three quarter of bonds are priced in US Dollar, which risks flight of capital.

ECONOMIC DATA PROJECTION 

FED Rate 0.75 pct = Looking for Two Hikes

US 10-Year Bond @ 2.445 pct = Target 2.90 pct

EURO @ 1.0480 = ECB policy and US Interest Rate will guide Euro, if 1.0050 survives then 1.10-12 zones will be test or else 0.9780

GBP @ 1.2284 = Choppy trade expected, on the dip if 1.1550 holds upside test of 1.27-29 is a good possibility or else 1.1040

JPY @ 117.30 = Likely to hold around 122 or else 125, break of 108 is required       for 102.

Chinese growth unlikely to move beyond 6.4 pct

Chinese Yuan @ 6.9429 = Target 7.25

Indian Growth Rate between 5 pct – 6 pct

Indian Rupees @ 68.13= To weaken by 2-4 pct

Brent OIL @ $ 56.85 & WTI @ $ 53.85 = Average around & 52-55 and WIT will remain a notch below.

GOLD @ $ 1150 = US Interest Rate pressure and low demand will add pressure on Gold $ 1260 should hold. Break of $ 990-1000 physiological, will further push Gold down towards $ 880. But buyers on dip will often pop up.

 (Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

https://asadcmka.wordpress.com/2017/01/02/outlook-2017-global/

Self Evaluation “Outlook 2016”

@Asad Rizvi
To keep a check of my own work (Technical Analysis/Economic Reports), since last year (2015) I have started doing Self Evaluation to examine my performance.

I am aware that self- assessment analysis is a very difficult choice when you have to do the process of assessing yourself. The sole purpose of this exercise is to improve the accuracy of analysis technique.

In 2016, I have published wide range of Technical Analysis/Economic Reports covering 42- Topics on Global & Domestic Economy that includes analysis on Gulf Currencies, Oil, SBP Policy Rate, US Bond Holdings, Pakistan’s Sovereign Bond, “Open Question on Panama Paper”, GCC Economies, IMF and Structural Economic Reform, National Budget, BREXIT, Predicted Donald Trump’s win, Suggesting Pakistan to fight Economic War against India, View on Gold & Currencies, IMF’s Christine Lagarde Visit to Pakistan and Indian Demonetization of India’s 500 & 1,000 Rupee Notes.

Out of total 27 calls in my “Outlook 2016”, I have made 24 correct calls and 3 of them were wrong, which in terms of accuracy is 89 pct.This does not include my prediction of BREXIT & DONALD TRUMPS’s victory.
Last year I made 16 Major calls, out of which only 1-call was incorrect, which was 93 pct correct calls.

Please check blog for references of past write-ups.

https://asadcmka.wordpress.com/

https://www.linkedin.com/in/asad-rizvi-114a683?trk=nav_responsive_tab_profile

 

Projected Outlook      Close as of December 

Global 2016 

US Interest Rate  = 0.75-1 pct       0.75 pct

US 10-Year Bond 2.70 %                2.51 pct

OIL @ $ 25-27                                 Target Met- On Feb 11 Tested Lows of $ 26.11

EURO @ 1.0405                            On Dec 05 Euro Tested lows of 1.0505

GBP @ 1.4040, On July 10           Target Met- On October 07 GBP tested 1.20

Target Revised to 1.20

Yuan 6.99                                        6.92 Target Met.

Indian Rupee 68.40                        Target Met- All time low of 68.86 on Nov 24

GOLD @ $ 1062                              Failed to test $ 980. Target was Revised Upward to test $ 1340-50, which it did hitting $ 1340 on July 31 2016.

JPY Original Target 126, on         On Sept 26, JPY almost tested 100 per USD Break of $ 114, Target Revised down to around and was met $ 100.

AUD @ 0.6710                                 AUD 0.7450 (Missed Target by Miles)

Projected Outlook    Close as of December

Pakistan 2016

GDP GROWTH RATE =                           CPEC activity gave boost hitting 4.5 pct

RS/USD @ 104.84 =                     in the Inter-Bank Market FALIED to meet Target

REMITTANCES =    to comfortable surpass $ 19 Billion by end December meeting Target. (Jan-June Rs 9,969Billion) (July-Nov Rs 7.800 Billion)

INFLATION =          Target of below 3 pct by end of June 2016 attained is 2.86%

(July – November 2016 is 3.92 % ) Projected Target is below 4.50 pct.

SBP DR/TARGET RATE =        Projected Slash by around150 bp. Discount Rate is slashed by 325 basis point to 6.25 pct and SBP Policy (Target) Rate is 5.75 pct.

PIB YIELDS =                          On Sept 21, PIB Yields on 3,5 & 10 years tested 6.20%, 6.70% & 7.80 % respectively. Target met.

PIB Coupon =                        3 yr, 5 yr & 10 yr was slashed by 175 bp, 150 bp & 100 bp respectively on April 01, 2016. Target Met.

Budget Deficit =              Govt FY Target of 4.3 Pct will be missed and was missed.

DEFICIT FINANCING =                         Rs1.4 Trillion. Target Met.

OPEN MARKET OPERATIONS =         will surpass Rs 1.5 Trillion and it did by large margin hitting all time High Rs 2.032 Trillion on 14 July.

ADVANCE/DEPOSIT RATE =              To fall below 50% – Target Met.

CIRCULAR DEBT = will be close to Rs 300 Billion. Target Attained.

Revenue Collection =                                              Short Fall Projected

Commodity =                   (Wheat, Sugar & Rice) Glut to stay in 2016. Target Met.

Boon for Wheat & Sugar Producers =                Enjoy Subsidy @ Tax Payers Cost.

 

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

US Elections-Indian Cash Ban-MPS !

@asadcmka
After June 23 Brexit, in last 2-months, couple of major global activity was witnessed such as US Elections and India banning Rs 500 and Rs 1000 currency notes.

Result of US Election was in line of our expectation, as we correctly called for Republican Party victory. There was temporary uproar after Republican win, but financial market wasted no time to stabilize.

US Dollar sky rocketed against Major/ Minor currencies and Gold that initially rose was soon offloaded. Global Equity market bouncing back sharply, but Bond yields tumbled on fear of interest rate hike.

Interestingly, after Trump’s election victory against market expectation, financial market is so far looking very stable proving every one wrong that feared unstable market condition after his victory. Prior to US elections the World Media, Political Analyst and World Leaders had one-sided view and were predicting economic collapse.

The sentiment against Trump was so negative that a group of 20-Nobel Prize Winning Economist warned that his win could jeopardize the foundation of American prosperity and global economy.

Until now it is proving to be a hoax and false call. I think the real test for the market will be witnessed only if US imposes harsh and one sided trade restrictions. Fiscal policy adjustment/implementation is every newly elected government’s prerogative.

The cause of current rally is because market has high expectation that Trump will ease regulation, cut taxes and increase infrastructure spending. This has given boost to the US stock market because strong economy means higher earnings.

But it also means higher risk of inflation, which increases probability of rate hike and worsen chances of further bond gains. It is because bond investors will get fixed return, which may not be at par with expected higher inflation that will be caused by robust growth, which is why market is witnessing sell off.

Soon after the US elections, immediate impact was that reallocation of funds wiped out nearly USD 1.3 Trillion across the globe. There still is a possible risk that if another 25-50 basis point move occurs, then it may further hurt Bond market to a certain extent and could destabilize or minutely undo the impact of stimulus that may ultimately cause damage to the nervous asset market.

India Bans Cash

Last week, in another surprise move Indian government clamped down black money hoarders by putting a ban on Rs 500 and Rs 1.000 currency notes.

This an extremely risky and dangerous move that have caught everyone wrong footed. The risk is that it can cause extreme damage to both Modi’s government and the economy. The delay in normalizing the banking system by another 4-8 months will have severe adverse consequences unless corrected at earliest.

As per Reserve Bank of India (RBI) the sole purpose behind this move is to arrest the abnormal rise in fake currencies of higher denomination and black money in the system. India’s blame game is that it will help to counter printing fake money by Pakistan. Imagine estimated amount of Fake Money is Rs 400 Billion, so time will tell that if this logic makes any sense.

Further, if cash comprises 86 pct of the cash money in circulation, which is India Rupee Rs 14 Trillion or equivalent of USD 205 Billion and as Modi has said 90 pct of all black wealth is out of country the estimate suggest that only 6 pct of the assets are held in currency notes.

My fear is that backlash is unavoidable if delay occurs because India is a cash dependent economy. It has nearly 22 Million credit cards. Out of 215.000 ATMs, less than 50.000 ATM’s are in Rural Area, hence there is a high probability of extreme social unrest likely to pop up in coming days if enough cash is not provided, as rural population is nearly 850 billion.

When there is cash squeeze in a cash economy everything goes on hold. Tourists are struggling to find cash. Purchase of essential goods becomes difficult, marriages are delayed or cannot take place because it’s an expensive affair, items of daily consumption cannot be bought freely, farmers cannot purchase seeds due to cash crunch, small business are blocked in a cash based economy and in India festivals are regular feature, which cannot be celebrated.

So the economy will definitely take a hit that can lead to hold on meeting of exports orders. The only gainers will be credit card agencies and all other sources that provide goods on credit.

Overall impact on economy could be severe. According to RBI until two days ago Indian Rupees equivalent of USD 80.8 billion (INR 5.33 Trillion) was deposited in banks against disbursement of USD 15 Billion (INR 1.03 Trillion) over the counter and via ATMs.

This suggests that the ratio between Withdrawals of money against Deposit is 5.86 times lower and is very alarmingly, which means banks will have liquidity in abundance.

Banks will be biggest beneficiary because of surplus liquidity in the system. Until Monday banks parked INR 4.32 Trillion of excess liquidity with RBI. Since deposit is piling up regularly there is every possibility that Indian Central Bank may face security crunch that has a total bond holding of INR 7 Trillion as of June 30, 2016. RBI offers bond against cash balance with the regulators and cash amount is never disclosed.

But it all points to slow down of economy that should lead to sharp fall in Indian wholesale inflation, which was at 4.2 pct in October that will comfortably fall towards 3-3.5 pct and hence, further aggressive rate cut in unavoidable. Indian Bond yields have already crashed by nearly ½ pct.

In such a scenario my estimate is that its GDP could take a hit of around 1 to 3 pct depending on cash availability in the banking system.

Though initially it sounded a brave decision, but the trap looks set as symptom of “Sever Money Paranoia” is probably unavoidable. Miracle is surely cure to this disease.

Pakistan’s Monetary Policy

I do not see direct or immediate impact of the two events on our economy, but Pakistan, despite all claims, which is going under an economic transformation period, is surely in a struggling mode.

I would like to focus on recent visit of Christine Lagarde IMF MD’s visit to Pakistan. She rang the alarm bell, according to her, 2-Million young people enter job market every year.

She pointed China’s slow growth that has average 20 pct trading volume with Pakistan as an alarming trend. She thinks we need to shift our stance accordingly and retool to gather economic momentum. China’s slowdown has impacted global economy that could be one factor hitting our exports as well, which makes sense.

She did show her concern about managing debt. She was blunt about very low number of people registered in tax net, which she thinks is unfair. She focused on public enterprises losses due to poor management as one of the cause of deficit burden, which is hindering growth.

In other words basically her message was Chrystal clear that our growth pace is pathetic. It is because we are far behind in terms of global standard.

Private investment is 10 pct of the economy against 18 pct average growth in emerging market. Pakistan’s export is 4-times lower and is only about 10 pct of the GDP.

Her recommendation includes improving business climate, increase transparency, accountability and remove red tape hinting corruptions as main cause of problem. She did strongly focused on completion of energy sector reform.

I think the message to State Bank of Pakistan from IMF MD, is very clear that for sustainable growth Pakistan is required to stimulate its economy.

What are we waiting for and delaying rate cut (Discount/Target/Coupon) ? The nation is paying heavy cost as financing debt (External & Domestic) due to major part of undocumented economy that has become a curse.

The economy demands sharp cut to re-balance and to activate industrial and manufacturing sector growth. SBP is also required to reconsider and widen its corridor gap for substantial increase in Private Sector lending activity, which will compel banks to lend money to corporate sector.

Here I would also like to add that we should not be complacent and take developments in India very seriously, because Indian economic woes is going to linger on for longer period of time that will ultimately impact/hurt our economy in coming months/years. Due to pressure on Indian economy smuggling activity is likely to increase and our borders surveillance should be tightened.

Indian currency can potentially suffer and is likely to further weaken. Indian remittances will surly fall and businesses will suffer. Hence, PKR adjustment could be possible.

If we do not act by taking pro-active measures our economy too will suffer badly. It’s never too late.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

IMF Christine Lagarde Vs 3 PhD’s

This is in response to “An open letter to IMF” by three eminent economist, Dr. Ashfaque Hassan Khan, Dr. Hafiz. A. Pasha & Dr. Salman Shah. To read click on the link below.

by asad rizvi

It is all about Acceptance and Recognition that leads to Reconciliation by the Rulers/Leaders. Recent Global Trend/Practices suggest that it is always Ruling Party’s prerogative to call a Spade a Spade or opt for Denial-ism whichever suits them.

Nature of Reality is no more a priority. Aspects of inequality, injustice, merit or being unfair is no more a serious consideration and hence it does not often come under scrutiny.

I can provide several political and financial examples/priorities.

Political Double Standard  

Despite voter’s mandate, look at the ongoing protest rallies in USA. And do watch the Anti-Lobby behavior Media and ( G-7 =  +5 -2= Russia & China ).

In June 2012, Egypt’s first Democratically elected government of Mohammed Morsi that had won elections by obtaining 51.7 pct of the runoff votes was forcefully ousted in July 2013 by the Sisi. No one bothered to take notice.

Another example is Turkey’s June 2016 coup. NATO or Western Allies did not come to Erdogan’s aid. Instead he was warned for post-coup crackdown.

Lingering Global Financial Crisis

-It is a self created Global Financial Problem, which is leading towards isolation because….

-Policy Makers/Regulators are solely responsible for all the Global mess, as they don’t do “What is Right“. They prefer to do “What is Easy“.

-Allowing Violations and Breaches

-By changing Accounting Rules to accommodate the violator for Wrong Doings.

-By allowing Window Dressing.

-By not questioning flawed Audit Reports.

-By means of Artificial Compensation (QE).

-By providing Cheap QE money for Bank Capitalization and by making lame excuse that funding is provided to protect the industry from collapse.

-Irresponsible Underwriting Practices and Flawed Credit Rating procedure.

Pakistan 

I have a totally different view from all what is being written or discussed in media about IMF MD’s Christine Lagarde’s visit to Pakistan. There was obviously some purpose behind her visit, which surprisingly came after completion of its 3-year program. IMF kindness surely has some sort or reasoning for easing conditionality’s and by offering large number of waivers.

Ball is now in IMF’s court. The urgency in my view was felt because of creation of Asia Infrastructure Investment Bank (AIIB), which is an international financial institution that was proposed by China. Initially supported by 21 countries that signed Article of Agreement in October 2014 now contains a very long list of prospective founding members in the bank that includes China, UK, Germany, Saudi Arabia, Russia, France, Iran and Pakistan too is a member.

It is a thorn in flesh, as AIIB aims to invest in infrastructure projects in Asia Pacific region. It has certainly raised concern in the leading Global Financial Headquarters because potentially it a threat, as an alternative to Western lead Financial institutions.

AII Bank’s first inaugural meeting of the Advisory panel consisting of 11-Members was held in Beijing on October 19, 2016. Former Prime Minister of Pakistan Shaukat Aziz is part of the elite panel.

AIIB’s, 2030 Agenda Target is USD One-Trillion, which points to future investment. I consider AIIB a threat as it may offer better terms and condition to the borrowing country.

After CPEC or China Pakistan corridor, if the country needs any assistance in future, I am expecting Pakistan to get outright funding support from them. If I am reading correctly, IMF sees risk of losing its permanent customer. Since 1988, it was only on one or two occasions that the country did not ask for IMF assistance. Further, in broader terms our major problem is tax collection and export slowdown. Fall in exports is not mainly due to exchange rate, which has minor contribution. Or else European, Britain, Scandinavian and Japans economy would have bounced back.

It is because of outdated technology, obsolete practices and fall in global commodity prices. We only rely on subsidies and rebates. Why no one ever debate advantage of Export Refinance rate dropping to 3 pct from 10 pct in last 5-years that gives competative edge to exporters.

Inflation is no threat, as it will comfortably stay below 4.75 pct by end of June 2017. Then why is Target Rate and PIB Coupon rate not adjusted in line with inflation data, which will reduce governments huge borrowing cost substantially cheap bank lending with stimulate economy.

Why are we so naïve that we fail to identify the real problem by looking at the barometer that gives true picture of the economy? It is bank Deposit/Advance Ratio (ADR) gap that has widened beyond imagination to Rs 10.447 Trillion and Rs 5.165 Trillion respectively, which is 49.44 pct of ADR. It was 60 pct eight years ago? Based on this calculation in 8-years bank lending to Private sector has squeezed by almost Rs 3.4 Trillion.

Our Direct Taxes is roughly around 35 pct, which is why government is forced to borrow pushing Bank and Non-Banks Holdings of GOP Securities to Rs 8 Trillion.

In my view rest of the indicator is a minor guideline.

It depicts that there is an urgency to sharply cut target rate and reduce coupon rate that will give annual relief of nearly Rs 300-400 Billion. Economic activity caused by growth in private sector will also help in increasing tax collection by another Rs 500 billion. So what are we waiting for?

While making decisions we have to think big and be bolder in making our decisions, or else at the end of the day, our debt would continue to balloon until it becomes nuisance and haunt respective governments, which is the ultimate price that we have to pay for further delay. And larger debt means inviting more trouble.

http://www.brecorder.com/articles-a-letters/187:articles/96110:the-other-side-of-picture-an-open-letter-to-the-imf/?date=2016-10-24

http://www.brecorder.com/articles-a-letters/187:articles/101987:an-open-letter-to-imf-reply-to-mof/?date=2016-11-11

I am glad my Trump Prediction is Correct

@asadcmka
When I first predicted Donald Trump’s win on Sept 25 2016, giving my analysis/reasoning that why he will Win US Election, I was badly criticized by my friends and foes. Some said, I live in a fools paradise, few of my friends said that I am naive, there were few giggles about my call and some even passed sarcastic comments about my ability to understand. But I had no doubts and always firmly believed that Trump’s Election Victory is for sure.
Here is my write-up in case you missed out.

Trump poses no Threat ! A Perspective

September 25, 2016

By
Asad Rizvi

US election is due in next 44 days (Nov 08), several polls suggest Clinton is leading by tiny margin. The world is still unsure which candidate is a better choice. In a survey last month National Association for Business Economics, large majority of its 414 of its members believe that Clinton is a better candidate.

Clinton as Senator is a known commodity. She has the governing experience and surely possesses diplomatic skills. However, commentators are of view that she is also known to hold grudges.

If Donald Trump is elected, he would be the 1st leader in last 5-Decades not to have attended any elected office previously.

Foreign Businessman/investors are sacred of him and some may even hate his business proposition, as he wants to impose massive tariffs on its US trading partners. But, his slogan is “Make America Great Again”, means he wants to protect America’s National interest.

What bothers most about Trump is his stance, his aggression, his weak moral authority to lead the world from front. He is certainly reckless when he speaks.
His idea of building a wall around USA and ban and deport Mexican did not find all around support.

His language against Muslims is a bit too harsh and worrisome that clashes with the religious tolerance. He wants to impose ban on Muslims from entering America probably in a hope to minimize risk/threat of terrorism, which is understandable, simultaneously it is a risky proposition if guidelines are breached and missed used.

But it is encouraging to note his positive attitude towards relations between Palestine and Israel. He said his priority would be to bring peace.

While, some of his ideology may be very confusing for the Americans and its Western Allies as he does not support Iraq War. His idea of maintaining good relationship with Putin is disliked, which I believe can help in easing global tension. It all puts question mark on his approach towards Foreign Policy.

But to me what is most worrying is his extremely aggressive statement that may have even worried US Central Bank (FED). He wants to print money to settle National debt ( $ 19.525 Trillion)

However, past trend suggest Business Community flock in huge numbers to support Republican Candidates because of its support for deregulation policy and low tax, though Chamber in New York showed some concern about Trump’s policy.

Further, Trump’s business acumen could be of great help to the US economy because of his understanding skills of trade and finance that should help the country and community.

Prospect of Trump becoming a President

In coming US Elections, there is a visible ideological divide that may lead to low turnout. In such a situation his hard line approach should definitively give edge to Trump over Clinton, as his passionate and ardent supporters will not stay at home, while voters having extreme views will also help in adding the count. This may give tilt towards Republican in overall voting count, which will increase his victory chances over former first lady. Similarly, Clinton may bag few votes based on same argument.

Though circumstances are different in USA, but let’s take couple of examples. Prior to 2012 French Elections, Hollande promised to transform Europe by fighting back Germany’s austerity plan to overcome European crisis by renegotiating Europe’s Fiscal issues.

Cameron, Merkel and few others openly supported Sarkozy against Socialist Party Presidential candidate, as he was considered threat to “Euro Zone”. Today, despite Europe is still in disarray. Hollande is in excellent terms with Germany.

Similarly in January 2015 Greece’s Tsipras won election because of his harsh stance towards lenders policy and carried Anti-Austerity slogan to win election. Few months later, he succumbed to external pressure and chose to compromise by agreeing to continue with the austerity package in return for Debt relief concession.

I do not see major threat of drastic changes in US Foreign/Overall Policy if Trump gets elected. Russians may feel comfortable, but gates for friendship will be not opened due to quite a few barriers.

He may continue for some time with his disturbing language to please his voters. But again we cannot ignore the fact that the secret behind his rising popularity graph is his hard line approach that has pushed him to the highest level.

He is a shrewd businessman and has several business interests in UAE, Qatar and Saudi Arabia some yet to mature.

Trump Win from Pakistani Perspective

In my view, I see “No Harm” if Trump gets elected. About us Trump whispered that “Pakistan is Semi Stable” but again he recognized that the two-countries have good relationship, which I take positively.

I may be the odd man here, but my man is Trump over Hillary Clinton because National interest is dearer to me. Knowingly that India feels more comfortable with Clinton, how can I support Hillary.

For over a decade, I have been closely watching Hillary. While Pakistan was badly engaged in Afghan war, Hillary after becoming Senator in 1995 visited India frequently paving way to bring his elected husband and USA closer to India after their Millennium YK2 visit.  She helped in engaging USA – India nuclear deal. It is also said that her closest Foreign Policy aids are helping India.

While, Trump has some reservations over Hillary’s close connection with India that suits Pakistan

Whereas, in comparison to Pakistan’s past and current all out support in various areas of interest, we feel despite larger contribution at the cost of our economy, we are left standard, probably because there is a clear shift in priorities.

The change in the dynamics of Regional and Geo Politics is clearly visible.  Hence there no harm if Pakistan decides to choose its own course and prefer to opt for better available option.

 

https://asadcmka.wordpress.com/2016/09/25/trump-poses-no-threat-a-prespective/

https://www.linkedin.com/pulse/trump-poses-threat-prespective-asad-rizvi?trk=mp-article-card

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

Currencies & Oil Short to Medium Term View

by Asad Rizvi
@asadcmka

While rest of the Global Central Banks is still in a struggling mode, G-10 countries could potentially be joined by Australian and New Zealand’s Central Bank in coming days to ease its rate.

I can safely say that FED for the time being has overcome threat of US economic recession. Stable oil prices further increases inflation expectation in USA, it also increases FED’s chances of hiking its interest rates sooner or unless it decides to further delay and go for yet another hold.

Recently we saw US Dollar gaining strength by over 5 pct against British Pound. Japanese Yen eased by nearly 3 pct and Euro too was under pressure because of last week’s monetary policy announcement suggesting easier stance.

However, we expect market to remain cautious due to November 8, Presidential Election as further big gains of USD could be short lived. During this period, market could witness choppy trades.

I am expecting resumption of US Dollar surge after the US elections, as probable Hike of interest rates by FED in December and extension of quantitative easing by the European Central Bank will be the driving factor.

Keep a note, I am yet not ruling out Trump’s victory, which could be extremely Bullish for US Dollar that will be followed by a sharp rally in US Bond market.

GBP @ 1.2227 = While, Pound Sterling that fell by nearly 18 pct against USD this year, should still find sellers on any up move, as the outcome of BREXT remains unknown and is threatening.

From now on-wards, lot will depend on negotiations and policy maker’s stance. UK data will provide further guidance, as combination of factors, which is worsening of economic condition and threat of Brexit is looming all over World will make life more miserable for BOE.

UK’s economy is already faced with sizable Current Account Deficit and further economic suffering may add pressure on its Balance of Payment. Risk of rate cut and easy policy stance would also weigh on currency, as BOE’s tone clearly suggests that weaker Pound is acceptable and higher inflation is not a matter of concern.

However, combination of factors such as Correction and US Elections may help Pound to push mildly higher for minor gains before she gets exhausted. I would still not prefer buying of Pound and would rather wait to pick the top to offload any holding or go for a short trade as downside risk is unavoidable.

I do not believe that hard Brexit has subsided or is abating, but would like to give minor room for 200-300 Pip correction, which could be possible if UK data does not disappoint.

On the upside, Break of 1.2390 Resistance zones is required for a test of 1.2550, which looks tough right now unless beaks and close above the Resistance level. On the downside, Break of 1.2080 will encourage for another test and break of 31 year low of 1.1850 levels. In Longer Term, Target 1.05 against USD is intact.

EURO @ 1.0883 = Key factors that will drive Euro in Near to Medium Term would be US elections, US economic data and off course ECB stance on Extension of Quantitative Easing beyond March 2017 will play major role in determining its next move.

In Short Term, Support lies around 1.0750-80 zones, which should hold to offer excuse for minor correction up to 1.0980 or 1.1060, unless Euro close below Support level in New York. However, close below Support level in New York would suggest 1.0550 as next downside target.

In longer term, Euro needs to fall below 1.0280 for larger drop, as only upside break of 1.1280 may delay the expected fall. My July 2016 Long Term Target of 0.9110 against USD remains intact.

JPY @ 103.82 = Bank of Japan’s Sept 21 policy stance will delay its much touted inflation stance targeting 2 pct. Since BOJ refrained from allocating funds against market expectation, it may neither help to shoot targeted inflation further.

Keep a close watch on 10-year Japanese Bond, which should remain in negative territory due to its ongoing negative interest rate policy.

However, past trend suggest that US Dollar move and US interest rate behavior always plays vital role in providing direction to the Japanese currency.

In immediate term 104.80 should hold, but JPY will find strong resistance around 101-20 levels until there is ample of evidence available that BOJ is no keener to inject funds in the name of QE, which will push JPY for a test and break of 100 Yen level against USD.

 

Oil = WTI @ 51- Brent $ 51.91-OPEC $ 48.51

In my July 15, 2016, note “Why Oil will not surpass $ 60-65 level”, https://asadcmka.wordpress.com/2016/07/16/why-oil-prices-will-not-surpass-60-65/

And in my August 22 2016 column “Oil is stuck in a Bearish Spell”

https://asadcmka.wordpress.com/2016/08/22/oil-is-still-stuck-a-bearish-spell/

I have given enough reasoning that why oil will not surpass $ 65 and my view remains unchanged.

However, as I have indicated several times in my write-ups that if Troika of Saudi Arabia, Iran and Russia (OPEC) agree to manage oil supplies by sticking to their commitment, potentially oil prices can recover and remain stable. But there is lot of politics and supply factor involved that demands firm and honest commitment to attain $ 65-70 price level target.

Policy shift is clearly visible as Saudi Arabia’s change in stance in last couple of months can be seen as it is not mixing politics with oil. Iran too seems to have realized that managing economy and deficit is impossible task as oil is their major source of revenue/income.

But Russia another beneficiary of higher oil prices has so far played key role in negotiations and helping prices to stabilize and it still has a task in hand. Russian importance can be sensed from the invitation given to Russian Oil Minister to meet GCC Energy Ministers in Riyadh in an effort to further stabilize oil market. Estimates suggest that in 2016 until now GCC oil revenue has plunged by USD 400 Billion.

However, Iran’s insistence to produce 4 Million barrels per day Oil could be the hurdle in talks unless some sort of understanding is reached.

Saudi Arabia’s Government Deposit (SAMA) is already down by over Saudi Riyal 100 Billion to somewhere around SR 1.050 Trillion, which is nearly 47 pct of its GDP. In 2015 it posted a deficit of SA 98 Billion, as its Revenue fell to USD 162 Billion from USD 260 Billion in 2014. The good news for Saudi’s is break-even oil price dropping to around USD 67 that has foreign exchange reserve of approximately USD 555 Billion dropping from all time high of USD 737 Billion in August 2014.

Similarly, Iran is better placed as cost of producing oil dropped by 27 pct to USD 62 a barrel. Iran’s economy that had unemployment rate of 11.7 pct in 2015 is projected to grow at 4.5 pct in 2016 is suffering from double digit inflation. In 2015, its fiscal deficit widened to 2.7 pct, though survived with a current surplus of 0.6 pct of GDP from 3.8 pct in 2014. It has a total foreign exchange reserve of roughly around USD 125 Billion.

Higher oil price is good news for Russia too that has recently suffered recession after oil price collapse. Its economy is showing signs of recovery. Rating agencies have revised its ratings upwards from negative to stable. Its Forex reserves fell to USD 391 Billion from highs of USD 537 Billion in January 2013.

Meanwhile, oil market is concentrating in talks between OPEC and Russia. Shale oil production and further growth should not be neglected that led to collapse of oil prices about 2-years ago. Some estimates suggest break-even price for 50 pct of the oil produced could average around USD 45 or slightly below.

This also means as the prices climb more production will be witnessed due to advantageous cost factor that again would increase risk for sharper fall depending on size increase in production. Lower production cost has become possible because of technological advancement. But the disadvantage is that shale oil depletes at a faster pace than convention oil.

More importantly, US election result could impact future oil prices due to policy difference. Hillary opposes Arctic drilling, whereas Trump is in favor. Hillary has reservations about using Hydraulic Fracturing or Fracking technology. Trump’s priority is “Energy Dependence”. He has promised that if elected he will lift moratoriums on energy production.

It all indicates that oil price could celebrate Hillary’s win, but Trump’s victory though will encourage oil producers, but prices could come under pressure.

“One bitten twice shy”, in the conclusion of my note, I am expecting Oil prices  to exhaust around $ 55-60 levels and should not surpass USD 65 levels, as Major Conventional Oil producers are well aware of the repercussions of cheap oil production that will once again lead to possible price war and sharp oil price collapse due to oil glut will be unavoidable.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).

What would $25 drop in oil price mean for the global economy?

http://www.brecorder.com/pages/article/1236802/2014-10-29/what-would-$25-drop-in-oil-price-mean-for-the-global-economy.html

 

BOE ! Will there be another Financial Crisis ?

@asadcmka

The question was asked by Bank of England (BOE) Knowledge Bank. Here is my write-up………..

As a student of economics I do not see any reason for global economic revival. Crash of financial market is unavoidable and will happen more frequently.

It is looming because no genuine effort is made to overcome the economic crisis. Measures taken after 2008-9 global financial crises are not permanent, they are mostly stop gap arrangements and hence problems will persist and will pop up more often at shorter intervals. Because of constant compromise it has weakened the global financial system.

Let’s take European crisis of 2008-9 and Greece as example. The Troika in their talk pretended to be extremely tough, but had to negotiate and compromise by agreeing to offer two massive bailout packages, totaling 240 billion Euros.

The key in this deal is long dated maturities. A tactic to delay rollover knowingly that Greece economy could never generate such large size income and can never pay back the loan amount.

Total size of Global Bank’s Balance Sheet that has surged to alarmingly high level in last 8-years from USD 7 Trillion to over USD 23 Trillion is another valuable indicator to judge Central Banks restrain and major cause of economic slowdown for being unable to provide funding to corporate sector, as large part of money was meant for Bank Capitalization.

What needs to be answered is that if all went well and is so far going well then despite tripling of balance sheets during this period, why are the global economies struggling for growth and has never recovered in true sense ?

The answer is simple. It is because the purpose of lending is not to stimulate economies. It is meant to protect the shareholders interest by injecting funds for Bank Capitalization or to avoid collapse. Unfortunately good part of beneficiaries are legislators and law makers or they have some sort of indirect link. Thus the intention in this situation is obvious.

The real owners of cash and poor depositor are the sufferers and they get nothing in return. Instead negative interest rate environment is created intentionally, as large size cash/commodity holders cannot store their assets at home due to many risks involved.

Decades old low “Interest Rate” environment, “Quantitative Easing” and recent talks of High Inflation” is Central Banks bully in the name of economic growth to support their loose monetary policy stance that has nothing to do with growth, prosperity or improvement of job market condition.

The whole purpose behind the ultra easing monetary policy is to reduce and slowdown the pace of monstrous “Rising Debt” to provide cheap funding to finance its debt.

Can anyone explain how would US, Japanese or European economy benefit from ongoing high inflation theory ? How will it stimulate economy and for how long ?

Economist/Analyst should not fool nations with their misguided theories that inflation is the growth recipe for advance economies.

Despite collapse of commodities and oil prices globally since last many years, there is no respite for the consumers. Common essentials items of daily use are already skyrocketing and are at exorbitantly high price.

Did airlines and transportation fares fell at same proportion ? What about Housing/Rental ? What about the cars prices after there is steel glut ? Is food not costlier than before despite falling trend in the agriculture/food sector since last 7 years?

And mother of all queries. Why there is no inflation despite printing of money, as amount may have exceeded USD 16 trillion is last eight years ?

Earlier, crash was delayed because of Chinese growth that was pulling the global economic engine for nearly 2-decades as the economy was growing at nearly 10 pct on an average. The real problem occurred when China’s growth started to deflate. Its Fx Reserves have melted down by more than a Trillion Dollars to USD 3.17 trillion.

In comparison to China, I consider India a peanut, it a very highly overrated economy. It’s economy is totally dependent on Foreign Funding and Remittances. Recently its banking industry has received further blow as it is suffering from over USD 150 Billion stressed loan.  India has nothing exceptional to offer expect its population, which is exploding sharply that has reached 1.3 billion and is now competing with China.

Brazil is in a total fix and in 2nd quarter of this year South Africa survived as scary period by not being thrown into Junk grade by the rating Agencies. BRICS has turned in to BRICKS !

Except for the Central Banks, did anyone ever give a thought that why the world has entered in negative interest rate era? And for how long are we going to stay in negative interest rate environment ? Or how soon can FED, ECB, BoE or BOJ hikes its rate by 1-2 pct. Not in two decades, because then there is no other funding source to finance its debt/deficit, which should be pure income.

Couple of weeks ago BOE Deputy Governor Shafik in her media appearance has expressed her uneasiness about UK interest rate and said she sees lower rates for longer period of time.

I have never heard Central Banks taking publicly or showing concern about the biggest global hit taken by the global economy due to oil price crash. In last 2-years the world lost nearly USD 2-Trillion in hard cash.

Probably because they are aware that there is no stopping to printing of money. They can print any amount at will without being questioned/challenged. They can change Accounting Rules for Window Dressing purpose. Global Central Banks Balance Sheets has inflated to abnormal size, which is against all economic theories/calculations, because they know they will never be questioned for extreme violation. They are aware that survival of Rating Agencies is based on their fees, so they will not act against their wishes like it happened in recent past. What about immoral and unethical practices?

And lastly Economist/Analyst associated with financial institutions and business houses will never talk of Bearish market condition because they are paid to provide tailor made economic theories/analysis to misguide the market with one sided Bullish sentiment/stories. Hence, they are compelled to always provide positive sentiment and avoid discussing much of negative talk. The will always give excuse that market is correcting.

The key to understand is the source of genuine income that Economies all over the globe can generate Cash Money, which can come from only four resources. Revenue collection is the major source of government earnings/income, but politicians/leaders all over the world are selfish and will always talk of lowering taxes for political reasons/gains and will never talk of tax rate hike to reduce the gap to meet its funding shortfall.

For any economy, Exports are another major source and backbone of economy to generate income. Exports are is suffering globally due to exorbitantly higher pricing factor.

Underdeveloped economies are heavily dependent on Remittances inflow, which is a major source of their income, which is the major cause of future economic crisis.

However, when economies are unable to generate income from their own resources they are faced with cash crunch and to manage their Balance of Payment (BOP) positions they are left with no option but to borrow from external recourses to meet BOP or have print money at home to meet its Domestic requirements.

Current global economic imbalance is result of over pricing and excessive overvaluation of everything that has pushed the market towards unimaginable heights.

Hence, it has reached such a high point that the crisis is here to stay forever, unless the size of global economy is deflated or reduced to half of its size, which is unthinkable and hence impossible because of protectionist approach by the global managers to protect the interest of their shareholders. Hence, market crash and crisis is here to stay forever.