Skip to content

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.

 

Ashraf Wathra – Central Bank Governor of the Year 2016

by Asad Rizvi
@asadcmka

Here I am quoting from my March 22 2016 article in Business Recorder “It’s never ending Math Equation” http://www.brecorder.com/articles-a-letters/187:articles/28030:its-never-ending-math-equation/?date=2016-03-22

“The incumbent SBP Governor, Ashraf Wathra, is a professional banker and is certainly a better choice; he has effectively managed exchange rate and inflation/policy rate. He may not be the best, but his decision on implementing financial and price stability is appropriate in meeting the required standards. In recent times market has witnessed SBP’s influence over exchange rate policy and setting of objectives for both monetary and exchange rate policies.”

After formally being appointed Governor SBP in April 2014, he played key role in reducing Discount from 10 pct to 6.25 pct, Target Rate to 5.75 pct and Export Refinance Rate to 3 pct from 8.4 pct.

He certainly had a plan in mind because soon after taking charge, he cautioned banks in advance that they should be prepared for lower interest environment. It is a tough decision in a Pakistani environment to act aggressively on matters pertaining to Policy Rate and Exchange Rate due to external pressure. Non-Performing Loans and Capital Adequacy Rates are other major areas, which is hovering around comfortable levels.

However, bank lending to Private Sector, which is backbone of economy is below the bar, as no one can argue after watching 10-year declining trend of Bank Deposit/Advance Ratio. Other two areas of concern are Helicopter Money (OMO) and Currency in Circulation. It is understandable that lack of Fiscal coordination is the cause of curse for which I would not put full blame on SBP.

But credit should go to the entire SBP team that has smarter people around its network that helped in getting the recognition with tremendous honor.

EUROMONEY

Central Bank Governor of the Year 2016: Wathra’s way wins plaudits for Pakistan Pakistan’s central bank governor Ashraf Wathra has played a crucial role in boosting the country’s financial credibility among the international community. Locals now hope to reap the benefits in both banking and capital markets. By Eric Ellis When Ashraf Wathra was formally appointed as governor of the State Bank of Pakistan (SBP) in April 2014, it’s a fair bet he didn’t expect one of his tasks would be to escort a glamorous royal from Europe. Hosting bothersome finance ministry officials from Islamabad, certainly. And opening the national accounts to fly-in IMF beancounters goes with the economic territory in wobbly Pakistan these days. But The Netherlands’ Queen Maxima? But there in Islamabad last February was Wathra, at the side of the visiting queen who, by all accounts, can at least talk the talk about emerging markets such as Pakistan. Maxima was visiting Pakistan as patron of the G20’s Global Partnership for Financial Inclusion. She launched the SBP’s Universal Financial Access initiative that is designed to bring financial services to at least 50% of the many millions of unbanked Pakistanis by 2020. Wathra’s royal encounter in Islamabad serves not as some lifestyle-of-the-rich-and-famous moment but illustrates one of the reasons why Euromoney has chosen him as this year’s central bank governor of the year. His enlightened approach in enabling Pakistanis to try to boost the economy in a frontline country whose domestic religious strife has international impact has been decisive. In a fractious land where only one in five people has a bank account, the SBP’s grassroots initiatives are aimed at bringing Pakistanis into the financial mainstream, but not at the expense of a steady hand managing and stabilising the more conventional stuff of central banks: reserves, rates and regulation. “He has done a great job,” says Nadeem Hussain, founder of the prominent micro financier Tameer Bank. Pakistan does have a tradition of such village-level financial initiatives, says Hussain, but not all of them have enjoyed enthusiastic backing from Pakistan’s state institutions. “The governor gets it,” Hussain says. “Rather than only taking care of the easier-hanging fruit, governor Wathra has taken on board the thorny issue of addressing the unbanked in a supportive regulatory environment. “Some 85% of us don’t have access to credit, and he’s the driver of the national inclusion plan. We have one for the first time in Pakistan.” Shazad Dada, chief executive of Standard Chartered Pakistan, agrees. Wathra’s leadership is returning the confidence of the international investment community in Pakistan, he says. “The last three years have been very good,” Dada says. “We’ve had a stable currency and we’ve gone through the IMF programme, and it’s safe to say that we now have a very stable economy. Now we are moving from stable economy mode to growth economy.” Dada adds: “People should not feel anything coming from Pakistan is toxic; on that front the State Bank has done a lot of work in improving governance, the banking environment and the confidence of international investors.” That confidence is shown in Pakistan’s evaluation by Euromoney Country Risk, a sovereign rating service that asks independent economists and analysts to measure key risk factors. Pakistan’s overall country risk score has been improving steadily in the ECR rankings, up by more than three points in the last year to score 31.2 out of 100 in the second quarter of 2016. Pakistan’s improved scores have pushed the country up 16 places in the global rankings since 2015 to 127th out of 186 countries. The improvements support ECR experts’ growing confidence in Pakistan’s economic and political institutions. Dada says Wathra is consultative and accessible. “He’s someone who has come from the banking side himself so he appreciates and understands the challenges of bankers. He is willing to look at new ideas and initiatives.” Dada adds that Wathra’s SBP has been supportive in efforts to further digitise Pakistani banking. Tameer’s Hussain says Wathra recognises that though Pakistanis might be underbanked, they are not underphoned, so he has advanced village-level telephone banking services. To that end, Tameer recently sold out to Norway’s Telenor Pakistan. Ratings agency Fitch’s BMI Research concurs that Pakistan is on the rise: “The gradual improvement in the country’s fiscal accounts and the reduction in direct government financing from the central bank are structural forces that are likely to improve banking sector profitability and the efficient allocation of resources, which should enable a steady increase in banking sector leverage without disrupting financial stability.” Longest serving Gubernatorial terms at the SBP are legally three years, though full terms have been rare in recent times. Indeed, it is 11 years since an SBP chief last served out a full term – Ishrat Hussain, who served during the military rule of General Pervez Musharraf. Since democracy was restored to Pakistan in 2008, there have been five governors; Wathra has been the longest-serving of that quintet. Before he was formally appointed governor in April 2014, Wathra had been acting SBP governor since January that year, having been deputy governor since March 2013. Wathra is seen as close to Pakistan’s finance minister Ishaq Dar, who has held the portfolio three times since 1998, each time under prime minister Nawaz Sharif. Wathra was already deputy governor at the SBP with responsibility for the banking sector by the time Dar came to office a third time. When Sharif was re-elected in June 2013, he again sent Dar to the finance ministry.

Dar wasted little time in elevating Wathra from deputy governor to acting governor when Yasin Anwar stepped away a year short of filling his designated term. Wathra is now four months into his third year at the SBP, and bankers in Karachi say that with executive stability at the central bank, it is no coincidence that the economy has also steadied, thanks in no small part to a sharply falling oil price. StanChart’s Dada agrees the falling oil price has been a “big helping hand” but, importantly, that opportunity was recognised by economic managers like the SBP and has not been squandered. A frontline state in the international struggle to contain Islamist extremism, Pakistan was in dire shape when Wathra took office. There were daily power outages, while inflation and unemployment were rampant and the rupee was volatile. We cannot declare victory on security and nor can we declare victory on the economy, but we have certainly made great strides on both  – Shazad Dada, Standard Chartered Pakistan Pakistan was in effect excluded from international capital markets, and entered the IMF’s emergency ward with a three-year, $6.7 billion structural assistance programme to save it from default in return for reforms on tax and privatization. “The only thing that had gone well at that time,” Dada recalls, “was that we had a successful transfer of power from one democratically elected government to another.” Dada says security has also improved since 132 schoolchildren were killed at an army school in a 2014 bomb attack by the Pakistan Taliban. “We cannot declare victory on security and nor can we declare victory on the economy, but we have certainly made great strides on both,” says Dada. In the year before Wathra took over as acting governor in January 2014, the SBP counted its net reserves at just $6 billion, the lowest point since 2000/01. In August 2016, the SBP reported that it held reserves of $18 billion, with another $5 billion held at other banks. With growth and confidence picking up, Pakistani stocks have also been among Asia’s best performers since then, prompting debate as to whether Pakistan will still need further IMF loan support. Banking confidence That confidence has been evidenced in the healthier numbers in Pakistan’s conventional banking sector. Fitch’s BMI calculates that at the end of 2015, total banking sector assets stood at a 50.9% of GDP, a new record high but still low by international standards. Pakistan’s banking assets expanded by 20.3% in 2015, Fitch says, thanks to a 14.2% increase in loans and a mini-boom in bonds as the banking system moved towards a more transparent system of government deficit funding. “Pakistan’s banking system is in relatively solid shape, with low leverage hinting at strong credit growth potential and high levels of capital keeping the risk of a crisis in the sector remote”, says BMI, while also noting Wathra’s firm hand on regulation of what had been a wobbly banking sector. “Under its Extended Fund Facility agreement, the IMF has encouraged the State Bank of Pakistan to engage with under-capitalised banks to ensure their compliance with the minimum capital requirement and capital adequacy ratio.” BMI adds: “According to the IMF’s latest country review, only two small banks were noncompliant, representing just 1.5% of total banking sector assets. In spite of the rapid increase in asset growth, capital adequacy has actually improved over recent years, with total assets relative to total equity falling to 8.5%, down from 13.7% a decade ago.” The improvement in the banking sector is reflected in the capital markets, where Pakistan is once again attracting the interest of international investors after several years when they thought it wiser to stay away. The clearest example would be last year’s secondary offering for HBL (formerly known as Habib Bank), a landmark trade that raised $1 billion for the state and managed to attract international investors into a domestic issue rather than the more familiar but illiquid path of a GDR. It attracted five separate orders of more than $100 million apiece, unthinkable just a few years ago. Pakistan’s finance ministry also raised almost $1 billion in successful syndicated term facilities last year. One foreign banker says he is so confident in Pakistan’s improving fortunes that the country represents his single biggest personal exposure. “There is a much brighter mood there now, and international investors can sense it,” he says. “I certainly can. It’s my largest personal investment as we speak.” Pakistan’s upgrade to emerging markets status in MSCI indices in June will boost markets further; local brokerage Elixir Securities has said the upgrade could trigger as much as $500 million of liquidity inflows. IPOs are expected, with June’s sell-down of a fertilizer subsidiary of Engro Corp an example of momentum in share issues. On the wider economy, Pakistan’s government has forecast GDP growth of 5.7% in fiscal 2016/17, up from an expected 4.7% this period, which itself has been the quickest growth since 2008. Fitch’s BMI is not as optimistic, expecting 4.2% for 2016/17 and adds that “we continue to see significant growth headwinds”. Page 2 of 2 Previous Single Page To receive similar stories, sign up for Regions and emerging markets emails. FURTHER READING ON EUROMONEY Euromoney Central Bank Governor of the Year 2016: Press release Ashraf Wathra ushers in a new era for Pakistan Finance Minister of the Year 2016: Prat-Gay lays the ground for a new Argentina FX: Pakistan’s climb to the emerging-markets club Pakistan’s central bank chief eyes balancing act Long way to go but Pakistan’s risk profile steadily improving Pakistan post-election peace dividend undermined by looming IMF repayment Central bank governor of the year 2014: Rajan emerges unscathed from Indian baptism of fire Nabiullina named Euromoney Central Bank Governor of the Year 2015 Central Bank Governor of the Year 2016 press release 2016 award Interview with 2016 recipient Contact Reprints About Euromoney’s surveys and awards Schedule for all surveys Promoting financial inclusion in correspondent banking Sponsored by Standard Chartered Eyes on the price: What’s next for FX transaction cost analysis? Sponsored by Thomson Reuters The mysterious potential of the blockchain Sponsored by Societe Generale The MXN puzzle and its implications for LatAm Sponsored by Scotiabank

Full article: http://www.euromoney.com/Article/3585803/Central-Bank-Governor-of-the-Year-2016-Wathras-way-wins-plaudits-for-Pakistan.html?p=2&copyrightInfo=true

Visit http://www.euromoney.com/reprints for additional distribution rights. For more articles like this, follow us @euromoney on Twitter.

Pound Sterling Collapses – 1.05 Intact !

by Asad Rizvi
@asadcmka

GBP @ 1.2424 = Pounding of Pound is no surprise to me. In my July 10 2016 note, “Pound could Plunge to 1.05”.

https://asadcmka.wordpress.com/2016/07/10/pound-could-plunge-to-1-05-euro-0-9110/

https://www.linkedin.com/pulse/pound-could-plunge-105-euro-09110-asad-rizvi?trk=mp-article-card

I gave my reasoning that why I see collapse of Pound Sterling in the making that needs to clear couple of support barriers to attain my target of 1.05, which is still far away.

Pound lost over 6 pct of its value against US Dollar and briefly fell below 1.20 to test 1.1840-50 zones before rebounding, which was 31 year low (1985). Some of the financial tracking agencies are even quoting much lower levels.

However, to attain my target, it is still required to crack and close below 1.18 levels to inflict further damage to Brittan’s currency.

The reality of European exit is certainly one of the major causes, which market may have started to realize. Some blame French President Hollande’s remark for calling tough stance on Brexit as a cause for Pound Sterling’s fall.

But some are blaming “Fat Finger”, which is error by a trader that triggers “Stop Loss”. The problem is that in recent times market is largely driven by automated trading resulting glitches. Similar thing happened in 2010 US stock market crash.

However, I am of the view that last week’s BOE Deputy Governor’s statement in a Tv interview to Bloomberg said that she think Central Bank will cut interest rates to help UK economy to cope with Brexit set the downside momentum.

I think her remarks that interest rates are likely to stay low permanently because of global structural and demographic changes as BOE will create money to buy bond was damaging.

She nailed the coffin by further showing her frustration by adding that interest rates been around 5 pct for centuries, even in ancient Babylon and does not see base returning to that level soon. This is extremely Bearish and I consider two sentences as future guideline indicating the trend unless disowned.

My view on Pound Sterling remains unchanged as fall is 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). 

Pound could Plunge to 1.05 – Euro 0.9110 ?

July 10, 2016

GBP@ 1.2938 = The next move for Pound Sterling is completely uncertain. This is because there is so much uncertainty that n one knows that what will actually happen in coming months or years after Britain’s decision leave European Union.

UK’s political landscape after PM Cameron’s resignation has also changed. Another thing to watch will be if and when Article 50 is invoked, which is clause from 2009 Lisbon treaty, which will pave way for UK to exit.

Pound Sterling has already hit 30 year low. Now market will be looking towards Bank of England (BOE) that if it decides to cut interest rates and provide liquidity. It is because after the decision to leave EU, Fiscal targets gets tough and UK’s economic outlook is faced with more challenges.

Such a move could be possible to make UK goods more competitive that would add further pressure on Pound Sterling. This means Pound could test 1.20-22 zones against US Dollar and break of 1.18 could bring more misery for Pound Sterling, as in 1985 it fell below 1.06 levels, which cannot be ruled out, if UK unrest continues to haunt. So keep a good track of all political and economic moves for next direction.

What can cause further plunge of Pound Sterling ? The short term pain looks obvious, but any hint of recession could be the beginning of demise of Sterling. Market will also take clue from investor’s behavior after the invocation of Article 50. New General Election is another possibility that cannot be ruled out.

It seems that EU member are perusing for a quick decision. There is every likely hood that ongoing economic woes and continuation of trend could push investors to the wall and they will start fleeing, which can be large in numbers. This will be truly bad for the UK economy.

Meanwhile, nearly 4 Million voters have already signed petition to hold another context.

, there is another dimension and the leaf can be taken from the European precedent by ignoring the will of voters. In 2008, the Irish voted down the Lisbon treaty, which was adopted within few months. Similarly Greece, despite against all odds swallowed harsh bailout terms.

Brexit, is more about sovereignty than immigration, agriculture related issues or quotas. EU countries that normally respect its voters, as it listens to its population may come up with different ideas this time. Majority of its Parliament members, which believed in “Remain”, can stop Britain’s exit from EU by denying endorsement, as they have the right to disagree.

Only this can be the turning point for Pound Sterling, which could regain 20 pct of its lost strength or else, there is no bright spot for the British currency at the moment.

Is There Threat to Euro?

EURO @ 1.1048 = Unlike UK that enjoys best job condition since decade, as its unemployment rate has fallen to 5 pct is struggling after Brexit, EU countries too is faced with daunting task.

In contrast European Union has an average unemployment rate of over 10 pct, which is the result of maintaining tighter condition since 2008 and by hiking rates in 2011 it got worst. Its forceful austerity measures taken to lower down deficit and liquidity constrains added to European problems.

Unfortunately, the economic condition in 27-Euro economies vastly differs from each other and is faced with high debt problem, the risk of slow growth and recession is becoming visible.

There is a huge risk shaping up all over Europe. Scotland and Wales independence referendum is a big threat. Remember any European country that tries exit EU risks triggering another financial crisis, as common currency is proving to be pain for Euro-region managers. Minus Germany and France, the other EU members are unable to cope with strong European currency. Greece and Spain with 21 pct and 25 pct unemployment rate is hardest hit.

Euro has strong resistance around 1.1250-80 zones that should not surrender or else 1.1480, which is not a preferred scenario, but needs to fall below 1.0840 for 1.0680.

In Medium Term to long Term, a break of 1.0380 will trigger sharp fall towards 0.9880 and cracks in Euro-zone region could see plunge towards 0.9110.

GOLD @ $ 1366 = Gold is the major beneficiary after Brexit, gaining substantially. In my May 01 and June 24 note, I made strong recommendation to buy gold giving two targets $ 1380 & possibly $ 1450. This year, so far it has gained around 25 pct.

Delay by Fed in hiking rate after economic slowdown in USA gave added advantage to the safe haven commodity. This is why nearly USD 4 Billion have been invested in precious metal funds last week.

Though I am not a gold fan that offers nothing in return, but the ongoing UK and EU concerns will likely give boost to the Yellow metal in coming weeks. FED hike delay is also supportive for gold.

Hence, buy on dip remains a preferred strategy for some more weeks. Support is at $ 1310 should hold, unless $ 1250 surrenders Gold buyers will dominate for a test of $ 1440 or $ 1470-80 zones, where gold should exhaust unless $ 1540 surrenders.

PAKISTAN/india – Fight Economic War

By
Asad Rizvi
@asadcmka

India should stop muddling and day dreaming to isolate Pakistan. It has a reckless habit of unnecessary adventurism and if it decides to impose war, India should be aware that Pakistan will not pelt stone or use sling shot to defend itself.

The courageous and determined Pakistani forces are prepared to respond to any kind of threat. Unlike past, in present times both the nation’s posses’ nuclear arsenals, but India should be well aware of Pakistan’s intention and its limitation.

However, with the passage of time, war tactic has surely changed and may differ to abide by the obligation and norms. Hence, in this modern era success can only be achieved by inflicting excessive damage to the hostile party by means of economic warfare based on game plan to weaken the enemy.

The most effective way to counter economic challenges, it is required to use appropriate business and financial clout at Domestic and International levels to obtain best result.

Let’s take a look at some of the events. In 2014, Russia in a tit for tat move reciprocated international sanctions by imposing ban on agriculture goods from countries (EU & USA) that acted against it. E.g., Poland was badly bruised and large quantity of its fruits and vegetables went in waste. Similarly, Russia’s consumer protection agency investigated McDonald’s cheeseburgers and milkshakes that must have given jitter to the American business interest.

Not long ago, in a South China Sea territorial dispute, China allowed bananas to rot in its port that must have given shiver to the Philippines government. So is the case with Taiwan, if any country recognizes it, China gets its claws out.

ECONOMIC FACT – INDIA

Pakistan is differently placed as it does not have enough economic arsenals in its sleeves to flex its muscles. Neither does India have enough to play its card to blackmail and corner Pakistan because of its tiny export volume.

Tough on paper India’s economy looks strong, but in real economic sense, India is certainly not very comfortably placed as much as it boasts about its overstated growth story because of its dependence on foreign funding.

To have a better sense, government spends 27 pct of the total domestic output and has a chronic budget deficit problem that has pushed Public debt to 65 pct of GDP

The changing global business realities are further going to dampen its buoyancy.

The size of India’s economy could be USD 2.2 Trillion. Two-third of its 1.29 Billion people lives in rural area in extremely poor condition. Its yearly per capita income is $ 1630, which is meager by global standard. Its Poverty rate is debatable, as huge segment is not in poverty count. Economist argue it range them between 35-50 pct.

50 pct of its population do not have shelter, 35 pct do not have direct access to water. 70 pct is have no proper toilets, 85 pct of villages are without secondary schools.

india’s Ambitious Economic Plan

India has a five year USD 1 Trillion plan (2012-17), is not attainable. Due to sizable trade gap, its current account deficit is heavily dependent on foreign money and its large inflow of remittances from Gulf countries, by combining both it is annually around USD110 Billion. It has FX Reserves of USD 368 billion.

UAE may have pledged to invest USD 75 Billion plus add another USD 30-50 Billion investment promises from the rest of Middle Eastern countries, China have promised USD 20 Billion investment, Japan wants to invest USD 35 Billion. These are not grants! They are all projected number against MOU’s, which is not commitment. Hence, unless investments are made, in my view good part is bully.

In 2005, POSCO South Korean Steel giant promised $ 12 Billion investment, it did not invest due to changing economic environment, as funding was not available.

PURPOSE of indian DATA

The purpose of this data is to give basic sense about the much hyped Indian economy, which may be growing at 7-8 pct, but the growth is not sustainable due to many risks attached. High Poverty Rate, highest level of income inequality in the region and investment freedom certainly poses many questions.

India may be competing with China against its population, as it is only a whisker away in numbers, but its economy is nowhere close to China’s economy that enjoys USD 3.21 Trillion Fx Reserves versus India’s USD 368 Billion.

The truth is that India is unlikely to get Gulf money due to oil price collapse. Neither Iran that for past so many years was blackmailed for cheap oil sale will provide oil at subsidized rates, as Iran is in desperate need of external funding.

While, India is already involved in a proxy war and in spreading terrorism in many parts of Pakistan, India is also well known for its hostile approach at home and it carries large list of enemies. They have a history of massacre controversies. There are more than 25 active separatist organizations and some of the most popular known movements are taking place in Kashmir, Assam, Khalistan. Neither Naxalites nor Maoist is bully boys.

From Pakistan’s perspective India is habitual to put blame on Pakistan for all of its dirty work at home and abroad, while it is always quick to point its finger on Pakistan for its entire wrong doings.

HOW PAKISTAN SHOULD RESPOND

I know questions will be raised, some may get uncomfortable, quite a few would dislike the idea and some may even think I am crazy.

But I am deeply concerned with the Indian approach. We should not kneel down to any of its unjustified demand. India is the most undependable and untrustworthy neighbor. With malicious intention and by political maneuvering India is planning to isolate Pakistan. We should not succumb to any external pressure.

India succeeded to conspire in canceling SARC meeting. It has asked our film celebrities to leave the country. It has demanded ICC not to put Pakistan in same pool. India would continue to create problems frequently at our borders and away.

When, what and where is our contingency plan ? What are we going to do if India succeeds in its malicious intention ? Are we going to remain tight lipped or simply write a requesting letter to UN and OIC to look into the matter or as happened in past, ask our Pakistani elected representatives to make few trips abroad ?

Pakistan cannot be complacent and has to act to protect its people and homeland by responding back with a planed strategy. Though difficult and risk too, but it can be done by formulating a strategy.

Pakistan has to prepare and indulge in Economic War by combining with Policy of Doctrine of Isolating against India to create economic hurdles, which is the only way out to effectively respond.

I know isolation is never possible without international support, so focus should be to attack India’s economy in such a manner that foreign investors are either fearful of investing in India and or start losing interest in investing in India.

Prepare master plan that should provide guideline, as how to engage foreign investors in India to add pressure on its business community and its government ?

Since our trade with India is peanut, or USD 2.61 Billion, which is 0.24 pct of the total trade size. Pakistan’s estimated trading volume through non regular channels is roughly around USD 6 Billion. Therefore, Pakistan’s trade boycott poses no threat to a country that has a total trading volume size of USD 1.087 Trillion.

Because of its dependency on foreign funding/borrowings, Indian market is jittery and vulnerable to any Domestic/International unrest. Any such happening can lead to sizable outflow that will create negative economic impact on its economy, as funding is also required to cater its current account deficit.

IT and Tourism is key area that India cannot afford slowdown, as it is of immense helps in creating job its huge service industry.  Overall its service sector contributes 22 pct to the GDP.

There are nearly 3300 foreign company operating in India against Pakistan’s 500 (approx), which plays vital for the Indian economy. Foreign firms cannot afford instability in India and in the region because of its business structure and reporting format, which needs to be frequently updated.

Pakistan should simultaneously counter Indian propaganda by lodging protest with UN and other World organizations about its claim of successful surgical strike on Pakistan.

India’s declaration of attack on Pakistan is sheer violation of UN Charter, hence Pakistan should announce that it has every right to counter India and has decided to pay back in same coin and hence, will hit back any moment. It is our prerogative to decide time and place of our choice.

Nervousness and skirmish at borders is never acceptable to the Rating Agencies. For India such adventurism is not sustainable for longer duration, due to heavy foreign investment that carries extraordinarily high price tag. War of words should add pressure. Any such situation arising from Pakistani game plan is a win-win position that should teach good lesson to the oppressor.

Key to foreign investments in India is based on ratings allocated by the rating agencies, which is (Baa3 Moodys) and (BBB- S&P) versus Pakistan (B3 Moody’s) and (B- S&P).

In present scenario ideal yardstick to keep track of economic soundness is Credit Default Swap (CDS). As of now India’s 5-year CDS is 132, Pakistan’s 5-year CDS is 385. If relationship between the two countries continues to deteriorate, CDS of both countries is likely to move higher.

Therefore, it is an instrument that should be keenly watched because in any adverse circumstances it will be the first indicator to react negatively.

CDS is basically a Derivative financial instrument for swapping the risk of default, where seller will compensate buyer in the event of loan default. Its popularity rose sharply after Euro zone and US Financial crisis (2008), as Rating Agencies lost its credibility, after collapse of the Banking Industry.

One thing is for sure that India’s economy cannot sustain such a situation for extended period of time as its economy could face huge risk of flight of capital. For the time being Pakistan has almost nothing to worry in this area, as it left very little option? After winding of IMF program, Pakistani is comfortably placed as compared to the size of Indian stake.

In my view, Pakistan’s only fault right now is the timing of its announcement to raise USD One Billion through Eurobond. I am surprised by the optimism shown Ministry of finance, as it has announced road shows in the first week of October 2016. In current situation pricing will add risk premium due to Pakistan/India tension. FM Dar should announce delay of its plan as cost will rise substantially.

Finally, Pakistan has tough task in hand, as India is trying to distance it from the rest of the world. Its stance is yet not known and nation is waiting to gather information from the policy makers.

The nature of conflict is extremely serious and challenge is immense. Pakistan has to seriously decide its next line of action without further delay. A pro active stance is the need of the hour to halt India’s possible next futile attempt to destabilize our dear motherland.

(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 poses no Threat ! A Perspective

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.

(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). 

Policy Rate & PIB Coupon Rate cut imminent in FY 16-17 

Pakistan’s Central Bank has enough room to make sizable downward adjustment of its Policy Rate in current Fiscal Year (FY), as inflation has sharply eased against its annual projected target rate of 6 pct. It is matter of choice between coming Monetary Policy and or until end of June 2017.

Economic factors clearly demand shift in rhetoric towards Dovish slant after August inflation fell to 3.56 pct against 4.12 pct in preceding month.

Based on 2-months data and ongoing inflation trend, it clearly suggests that for FY 16-17 inflation should not surpass 4.25-50 pct levels. The dust has settled, risk have diminished, so why waste time ? There is window of opportunity for the SBP to act and it should not delay further.

In my earlier notes, I have given enough reasoning on several occasions that why there is no threat of sharp oil price hike in the international market, which is because of the power game and mix between Geo Politics of Middle East and Global Supply/Demand factor. Neither there is any threat of disruption to food supplies in near term.

Furthermore, drop in Private Sector activity and slowdown in seasonal demand has eased liquidity pressure, it should also help to contain inflation.

In view of Economic/Inflation Outlook trend, there is every possibility of SBP maintaining its loose monetary stance for extended period with caution, as long as it is able to manage inflation.

Though the pace of economic activity may be gathering momentum, but output remains below potential or the desired level, since growth is not translating into benefits, hence the challenge faced by SBP is immense.

Despite sharp fall in oil bill, staggering Debt to GDP is exploding at a very fast pace, which is another big cause of worry for the administration.

It has already breached Fiscal Debt Limit badly and the authorities are clearly struggling to cope with problem due to squeeze in Revenue/Exports. The Economy cannot afford laxity anymore that has reached a critical stage and hence, fiscal rules need to be set.

Independent economist frequently dispute current growth number, but the challenge is to stimulate economy much faster than the typical velocity to attain Real Growth target to create new Job Opportunities, reduce poverty and improve social welfare challenges.

For example, mathematically adding backlog and then based on 3.8 Million annual population growth, the yearly housing and employment need is nearly one million homes and half-a million jobs.

RUPEE PARITY/EXPORTS

We have to decide our future course and should not live in fool’s paradise. Such as exporters hoping that sharp depreciation of Rupee will push exports higher and put a halt on import because it will become costly.

Past Data suggest that such strategy only provide temporary respite to the economy, but was soon exhausted.

Exchange rate is determined by the market participants led by supply/demand factors. Oil bill is halved, remittances flow is not a matter of concern, BOP like past is not a big worrisome factor, which means pressure has eased due to supply.

Instead, despite relief in energy prices, substantial cut in Policy Rate in recent years, which is slashed by more than market expectation. SBP data of End User, Export Finance Rate dropping to 3 pct from 10 pct (Jan 01 2011), exporters failed to deliver and yet they demand concession.

The fall in exports is mainly because of decline in textile sector due to unprecedented weather conditions that has nothing to do with Rupee parity.  Sluggish exports is an ongoing trend for years and the cause of economic misery is lack determination and vision, as business community is solely focused and dependent on various types of concessions. To fix economy government is required to concentrate on industrialization and outdated agriculture technology.

The commentators are all the time honking and pointing towards rising Debt to GDP are simultaneously demanding sharp depreciation of Rupee suggesting 20 pct adjustment will push debt higher by Rs 1.51 Trillion and is inflationary.

My query to the critics is then what is the justification of their demand and what assurance they can provide that the economy will benefit ? How many jobs will e created ? How much will it add to the to the National Kitty in share of Direct Tax ? I am excepting that next time all Economic Guru’s  will make valuable contribution by providing genuine solution rather than making meaningless, obsolete and outdated demand/suggestion  because history suggest Devaluation/Depreciation recipe caused more harm rather than benefiting the economy.

SBP’s stance on Rupee, allowing market forces to determine the rate/trend is an appropriate strategy, as stable Rupee is harmless as Doves.

CAUSE OF SLUGGISHNESS   

One of the major causes of Economic slowdown is Liquidity trap that had hindered growth. In recent times, banks balance sheets have expanded enormously helped by injecting calculated amount of Helicopter money through Open Market operations (OMO) to purchase risk free government paper. Ratio of Deposit/Advance falling towards 51 pct in this decade will provide further evidence that what has caused sluggish growth.

Investment by banks in government securities due to lucrative return in less riskier product is obstructing real growth, as banks are not willing to provide additional credit to the corporate sector to expand nor helping new business o grow.

POLICY RATE/PIB COUPON RATE

Policy makers should take a leaf from FED, BOJ, BoE, SNB and ECB. Why is the World Central Bank desperate to opt for zero to negative interest rate policy? Slow growth is certainly one big factor, but they are aware of cost of debt. Hiking of rate will add cost of debt, which has reached unmanaged stage.

Remember, Exports, Revenue Collection and Remittances are the only source to obtain cash money. Selling of Asset is the last and bad means to arrange cash funding. If an economy fails to generate cash, then Debt is the fifth and worst funding source, which cannot be returned unless without generating income. There is no other or 5th source to generate/arrange money.

SBP/MOF (Administration) is required to take a very serious note in formulating its Monetary & Fiscal Policy and hit the deck to spur growth and reduce its borrowing cost by sharply slashing Policy Rate and PIB Coupon rate, as demand for government bond by banks is not ebbing and they still have strong appetite for long dated assets.

Inflation data clearly suggest “Steeper Curve”, in comparison to Policy Rate, which means the gap between two excessive. It clearly sends wrong message and needs to be adjusted.

SBP’s priority should be to act quickly and to do it big way in 1st go and simultaneously MOF should help to reduce 10-year coupon rate by narrowing it down to around 200 basis point of the inflation rate.  Based on Total Stock of Bank and Non-Bank Holdings of GoP Securities of Rs 7.643 Trillion, total annual debt cost will be further reduced by Rs 200 Billion. Or else at current rate Debt amount will surge at a very faster pace.

Since, MPS is due on Saturday  Sept 24, which is prior to IMF’s final meeting of its last tranche, whereas IMF’s Christine Lagarde is also due to visit Pakistan next month, it is tricky to make a call.

However, any cut in Policy Rate prior to the IMF Boss’s visit will be a clear sign of hint for further monetary easing in this FY, confirming Policy makers have decided to “Flatten Yield Curve”, an indication that inflation is of less concern and in future inflation is going to fall or will remain on the lower side. Flattening of yield curve is also an indication of slower economic growth.

(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). 

Gold to Surge – Currencies will Remain Choppy. Week Ahead, Sept 11

Sept 19 –  View Intact

Gold @ 1327.50 = Though support line $ 1275 is the key for current ongoing gold rally to exhaust. However, $ 1300-10 is a strong support level, which may not surrender as gold still has potential for $ 100 up move. Potentially gold could make another attempt towards $ 1360-80 zones this week.

JPY @ 102.65 = Japanese Yen is hard nut to crack and is likely to resist gain against US Dollar in Short to Medium Term. Strong support lies around 103.80-20 zones, with major support around 105.50-80 levels, which should not surrender.

Therefore, any weakness of YEN will be opportunity to buy Japanese currency. This week I see risk of further gains, break of Resistance level 101.20 will certainly challenge BOJ seriousness about its intervention threat as Japan’s Central Bank is struggling to add stimulus. Hence, failure to hold Resistance will risk for another move towards 100.

GBP @ 1.3260 = Cable has strong resistance around 1.3450-80 zones, which is unlikely to give up this week or else move could extend up to 1.3620. A dip below 1.3080 is required for further decline.

However, Pound will potentially find buyers on dip, as UK data will provide further direction to Sterling. Better economic numbers this week may give further boost, as traders/investors will have faith in the British currency, as they start believing that Brexit shock is initially much smaller than earlier projected.

Thursday’s MPS & Retail Sales data this week will provide further direction. Therefore prior to MPS announcement, on up-move profit taking would be the preferred strategy. Medium to Long Term Bearish view intact.

EURO @ 1.1231 = Since ECB could not add stimulus, it has given boost to the currency. This means minor up move is possible. Support 1.1120 should hold, violation of this level will expose currency to test next support zones at 1.1020-50, which may not happen. However, break of 1.3050 will open gates for 1.1420.

@asadcmka

(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 Debate – Pakistan

Soon after IMF’s End of Mission Final Review (Pakistan), there was a press release by the staff team that conveyed its preliminary findings, which according to the website do not necessarily represent view of IMF board.

Interestingly unlike IMF, which is commonly known for its tough and firm behavior prior to offering loan, in its concluding remark gave extremely positive input on growth, inflation, exchange reserves, budget deficit and by praising revenue collection for meeting its target is an interesting observation.

While, it opted for softer tone on important issues such as cash flow energy, exports and global uncertainty, which is lingering on since 2008.

IMF is optimistic, on China Pakistan Economic Corridor (CPEC) investments, which is 74 pct energy related and is stretched until next 15 years. Its Bullish sentiment is mindboggling, as the view expressed is common statement, which is not backed by hypothesis or any logic of evidential support.
Hence, combination of soft and positive approach has opened a debate about the overall economic performance because Pakistan’s economy is now exposed to different types of risk, as the economic survival is totally reliant on Domestic and Foreign Borrowings.

The unaddressed risk associated to the economy are looming debt and deficit financing risk linked to cash flow, credit risk, liquidity risk and or operational risk, which will ultimately increase in shape of legal and regulatory risk.

IMF did not utter anything on Circular Debt. It did mention about minor breach of Budget deficit and Net Domestic Asset (NDA). But failed to put a note on Currency in Circulation that has surged to alarming high level and is Rs 3.335 Trillion, largely because of undocumented economy.
IMF growth sentiment is mainly dependent on expansion of Construction activity and CPEC investments, but minus CPEC how growth is possible when liquidity in the banking system is completely choked. There is hardly any vision or plan for large industrial and manufacturing sector growth.

More importantly, since August 2008, SBP is compelled to adopt dual policy, as it was encouraged by IMF to maintain tighter stance and simultaneously offer HELICOPTER MONEY to banks through its Open Market Operations (OMO) for investments in Government Securities.

Against Commercial Bank Deposit of Rs 10.3 Trillion, total amount of investments in Government Paper is Rs 6.169 Trillion. Exports are at 7-year low and remittances are likely to remain almost flat to mildly up.

Other major factors responsible for causing economic instability are the decade’s old outdated protectionist approach by the various elected and non-elected governments by not realigning with the market norms. Looking at the past trend, I can safely say that it is intentional protected approach by the respective governments to refuse imposition of tax on all types of income and to solely rely on indirect taxes that constitutes nearly 65-68 pct of the total collection. Share of Direct Tax in 2000-01 was 32 pct, which surged to almost 40 pct in 2006-07 and is down again to around 32-33 pct.

What is questionable is that IMF, which is constantly lending to Pakistan since 1988 and has so far given loan on almost 17-18 occasions. They are known for imposing tough conditions before offering funding and they put lot of emphasis on revenue collection. Then all these years, why IMF opted for a friendly approach and did not demand increase in Tax Collection that kept on declining, as couple of years ago Tax to GDP fell below 10 pct and is now roughly 11.5 pct (current) from 17.4 pct (1988). This has caused economic disaster, as poverty rate during this period jumped from 23.5 pct to around 40 pct. Then unemployment rate was 3.1 pct, which is now a whisker below 6 pct.

Another economic nuisance that IMF should highlight is the common practice to regularly rescue business community by offering tax payers money by means of subsidies and rebates, which is extremely discouraging for the Middle to Lower Class of the society, which has to pay the price to rescue mostly tax evaders for their faulty business decisions. If it is not in its purview, then IMF has no right to demand rising of taxes by indirect means that adds burden on the poorest of the population.

CLOSING REMARKS

Growth/Budget Deficit
Projection of 5 pct growth is an achievable target if we combine CPEC along with as higher Exports minus Circular Debt, which is nearly 1 pct of the GDP.

But I disagree with the Bullish idea of Private sector growth, which is the major cause of Economic Debacle. Spending and Austerity are two worst combinations and maintaining Budget Deficit within tighter limit along with stimulus is an impossible task.

Allocation of Circular Debt amount is another dodgy and key number that can severely impact both GDP and Fiscal Deficit number.

However, combination of factors such as Exports, CPEC, Cut in Target Rate, Tax relief to 5-sectors and increased Bank Lending should comfortably push growth beyond 5 pct.

Exports & Exchange Rate

EXPORTS
There is no rocket science about possibility of growth in Export Sector.

Despite lackluster trade policy, export growth will certainly bounce back not due to positive shift in policy stance or because of excessive demand of Pakistani goods.

It is likely to occur because of bad global weather pattern, which increases the probability of excessive floods, hurricane and drought that will push food prices higher.

SBP is required to behave in proactive manner and allocate enough funding to the agriculture sector through commercial banks. Such a move will give much needed boost to the export sector.

Textile sector will surely make a big come back. Hence, if we add overall growth, IMF target of 7 pct growth will be comfortably be doubled.

However, Pakistan is still way behind in the run and to increase productivity, it is required to concentrate to improve its farming method by modernization and efficient farming.

EXCHANG RATE

Current Exchange Rate Policy is commendable, as excessive depreciation of Pak Rupee in past 6-years failed to bring desired result. Instead weak Rupee brought misery to the poverty ridden nation in shape of inflation.

Analyst/Economist advocating weaker Rupee should have no qualm about weaker Rupee, as SBP has already blessed Business Community by sharply slashing export refinance rate by 5.5 pct, which is down by more than market expectation from 10 pct in Dec 2010 to current levels.

SBP’s Target rate of 5.75 pct is extremely competitive that not only compensates against stable Pak Rupee, it also counters inflation.

In my view, arguing for weak Rupee and comparing Pakistan’s exchange rate with USA, UK, China, Turkey, India or Indonesia makes little or no sense.

How much did the Pakistan’s export increase since 2010, as Rupee is in 6-years weakened by nearly 25 pct ?

Then my counter argument is that where is the interest rate comparison ?

Six years ago, FED was at nearly Zero, China interest rate is down by mere 0.75 pct and in same period UK lowered its Bank Rate by 0.5 pct.

For readers information India during this period jacked up its interest rate by 2.25 pct. In six years Indonesia slashed its rate by 1 pct and during this period Turkey raised its interest by 1 pct to nearly 7 pct.

Further, there is lot of groaning about higher petrol prices in Pakistan, for record sake only in Indonesia petrol price is cheaper by 2 cents than Pakistan. It is costlier in all other countries.

Inflation & Debt

Inflation
IMF’s inflation target is 5.2 pct for FY 2016-17, which is against expectation of higher oil prices. Based on signs of Global slowdown, as China, Europe and Japan are in struggling mode. BREXIT is another threatening factor that can have larger impact on Economies of the World.

Therefore, I see no reason for sharp rise of petroleum prices in Pakistan. It means unless energy prices are further jacked up, inflation momentum will remain slow.
Spurt in food prices is another factor that can spur inflation, but this is normally a season or weather related short term phenomena. Hence, I see no reason for inflation to surpass 5 pct and based on my calculation inflation is likely to close around 4.75 pct by FY 16-17.

EXTERNAL & DOMESTIC DEBT       

Pakistan’s external has surpassed USD 70 Billion. Similarly Government Domestic Debt has hit Rs 13.623 Trillion, comfortably surpassing Rs 20 Trillion marks and is slightly above 63 pct breaching FDRL’s 60 pct limit.

Government has shown its willingness on paper to bring it down, but this has only appeared in a media report, as there is no disclosure of plan or strategy that how they will reduce the number or what will be the source of income. Enlarging of GDP can be another source.

However, the key to reduce pace of DEBT growth is by sharply reducing Target Rate and Coupon of Government Paper.

This is one of the major factors, Global market is witnessing shift in Central Bank’s Monetary Policy Stance towards easing and now many countries are opting for NEGATIVE Interest Rate.

Similarly in Pakistan, where increase in Revenue Collection is unthinkable due to conflict of interest, Ministry of Finance should take a cue from global interest rate trend and sharply slash YIELD & COUPON rate to slowdown the pace of DEBT Growth and simultaneously reduce its funding cost or else nothing can stop debt growth. Though higher GDP may reduce in percentage terms, but size of funding will become impossible to manage.

Remittances

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.

During this period there is surplus liquidity in the market due to purchase of sacrificial animal, which increase Currency in Circulation by roughly Rs 150 Billion and cash on hand is held for 1-2 months.

After two major holiday months, flow of Remittances gets back to normal for remaining next 8-9 months period.

However, I support IMF view on remittances, which is likely to remain from flat to mildly firm. Hypothetically based at 2.5 pct or 200.000 job losses in a year, which is unlikely scenario because construction business is hardest hit due to liquidity constrain. Pakistani labor is comparatively fewer in construction activity.

Hence, the country should still enjoy Remittances flow of nearly USD 20 Billion, unless there is major turmoil in M/E oil producing countries. Whereas, another key indicator is Global Remittances growth, which is likely to remain on the up by 2-3 pct. Last year despite fall in remittance in the region Pakistan enjoyed higher growth.

The Problem is that, in true sense there is Real Economic Problem, as our economic woes keep on piling up. Our Economic Guru’s are always quick to “Hit The Trick”, probably to gain extra mileage, but the sad reality is that our economic experts has never come up with a number based recipe for steady economic growth, so that they do not get exposed.

(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). 

Oil is still stuck a Bearish Spell

 

WTI $ 48.25 = In my July 15, 2016, note “Why Oil Prices will not Surpass $ 60-65”, https://asadcmka.wordpress.com/. $ 10 dip did occur and is now undergoing correction. My view on oil remains unchanged and bearish, as it need to break 1st Resistance levels of $ 52-55 and then major resistance level of $ 62-65 for flip, which is not a preferred move.

Nothing has really changed. Optimism shown by the Qatari Minister of Energy about 2-weeks ago, expressing positive sentiments is without any evidential reasoning, which gave short push to oil, as he is also the current OPEC President.
The truth is that despite 40 pct of the global oil contribution by the 13-members OPEC countries, its standing without Saudi Arabia is nothing.
Oil market volatility is here to stay until Geo-political condition gets better and uncertainty is removed.

To support OPEC’s proposal cut, Saudi Arabia has to accept its oil partners freezing output proposal to lift oil prices. But Saudi’s would never agree, as they sense risk that when they slash production other producers will jump in to get hold of the market share. This could be one of the reasons that they opted to walk away from Doha talk in April that could have paved way to limit oil output.

In their previous OPEC gatherings, Saudi Arabia has always demanded conditional production cut from the major oil producers, which never found any support from its partners. Saudi Arabia’s average oil production is more than 10.2 million barrels per days or 10.62 pct of the global demand/production. In six-years Saudi production soared from 7.8 million barrels per day to its current level or by 2.4 mb/p

But, there are major factors too, as trio Saudi/Iran and Russian tension should cool down. First sign of easing will be when they all are back on talking terms, which looks unlikely to happen in present circumstances.

Therefore, Saudi Arabia may prefer to maintain pressure on Iran by not allowing prices to rise much higher. Whereas, unless EU-USA sanctions against Russia is removed, oil politics will dominate and price recovery will remain a difficult proposition that deprives them of cash money.

From Iran’s perspective that was producing 3.7 mb per day in 2010, its production fell by nearly one million barrels per day in next 3 years. After lifting of sanctions around 3rd quarter of 2015, it is now trying boosting its production to attain its lost market share.

But Iran is unlikely to cut its production because of its aging oil field, which according to some analyst is producing 10 pct less oil. Therefore, to upgrade its infrastructure, which requires $ 10-15 Billion funding, in next 5-years its plans to produce 4.6 mb per day to meet both the ends? All this may not be as easy and simply for Iran because US Dollar based transaction is still not freely permissible.

I am of view that oil after briefly hitting below $ 40 marks or nearly 20 pct decline is simply in a correction mode, as the current move is caused by short covering and not due to unusual demand.

The economies of major oil countries will continue to struggle, as the glut is unavoidable. There are faced with threat of deficit/debt

Global growth projection by leading world agencies such as IMF, World Bank, and UN is murky.

FED is unsure about the timing of US growth that has slowed down a bit. Despite decade old QE and negative interest rate policy, BOJ continues to struggle. ECB has already lost its path and is not out of woods since nearly 8-years, BREXIT is adding to its woes, as it brings more risk and uncertainty to Europe and around the Globe.

Therefore, I remain bearish for oil. The levels to watch is $ 52-55 zones, which is tough to break and then $ 62-65 is crucial level for future direction, which is not a favored move. Break of $ 44.20 will encourage for a test of $ 38.90, targeting $ 35 in Medium to Long Term.     

(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 YEN is favored currency & could hit 95 ?

So far the moves in are quite in line of my July 10 forecast. JPY tested my target around 100 levels before correcting towards 107 and now looking good to test and break 100 levels convincingly in coming weeks/months after minor correction.
Similarly there is no change in view, as Pound Sterling is likely to take sever beating in coming months that will have spillover effect on EURO.

For Earlier Comments on CURRENCIES, please see link…
https://www.linkedin.com/pulse/pound-could-plunge-105-euro-09110-asad-rizvi?trk=mp-author-card
https://asadcmka.wordpress.com/2016/07/10/pound-could-plunge-to-1-05-euro-0-9110/

Why Japanese Yen is the most Popular Currency ?

JPY @ 102.30 = One always wonder that why despite all odds against Japanese currency it is investors most favored currency.
It is especially popular especially for carry trade. The estimated size of Yen carry trade is well over USD One Trillion, which is an uncovered interest arbitrage business. Basically it is all about financial engineering. Transaction is done against cheap borrowings of a currency offered at low interest rates, which is converted into high yielding currency or bond.
Interestingly, Yen is frequently able to gather momentum and always look threatening to challenge BOJ, though its economy is constantly struggling against Recession and Deflation. Japan’s Public Debt ratio against GDP is 249 pct, which is highest in the world.
Some of the causes that have led market to believe YEN as a safe-haven currency are because of below market expectation of BOJ Stimulus package, inconsistence Fiscal and Monetary Policy with no threat of intervention at current levels. FED delay in hiking of its interest rates and lower bond yields, negative interest rates in many of the major/large economies and Euro-zone uncertainty after Brexit are some of the known common factors that will help Yen to gain sharply against USD.
But more importantly a big supportive factor that forces Japanese investors to rush for YEN purchase is when they decide to liquidate part of their exposure of foreign assets at the time of uncertainty. It is estimated that the size of foreign assets are worth nearly USD 3.5 Trillion USD, which is larger than the foreign investor’s investments in Japan.
Further, decade old close to zero interest rate policy also encourages borrowers to avail cheap loan, which is why JPY is the most popular currency for carry trade.
In context to present Brexit/Euro-zone scenario, in all probability until Article 50 is invoked, threat will loom, as Brexit is likely to add to the existing trouble in the region, which will make investors jittery and nervous, so Yen demand will stay for longer period.
Any corrections will provide good opportunity to buy Japanese currency, which should not surpass 105-107 zones and until 108.50 surrenders.
Hence, JPY will continue to test BOJ nerves and is most likely to gain beyond 95 levels versus US Dollar in Medium to Long Term unless Japanese Central Bank decides to intervenes aggressively or provide excessive liquidity.

GBP @ 1.3051 = Though, apparently overall economic condition is stable, as its unemployment rate of 4.9 pct is lowest in decade, consumers are spending, but Brexit Vote has caused lot of uncertainty, as decline in overseas investments will most likely lead to economic slowdown.
Bank of England did not wait for long to offer boarder monetary package sensing changeover could bring trouble in future, as Britain decided to exit European Union.
It slashed its key Discount Rate by 25 basis point and is willing to allow inflation to overshoot a bit. BOE decided to increase the size of its asset purchase by nearly Pound Sterling 160-170 Billion that includes Purchase of (Government & Corporate Bond plus Term Funding Scheme).
BOE has certainly opted for a loose monetary policy or unconventional monetary policy that will push Pound Sterling to new lows in next few months. However, Pound should not close above 1.3580 in Medium Term.

(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 may hold back on cutting its Target Rate

The upbeat of the economic growth is not sufficient enough to clam uneasiness amongst major part of the population. Basically economic numbers only suggest an increase of wealth of a nation, as development work did not improve the social condition within the nation because of irrational anemic growth.

This is because the country is still unable to provide its citizens fair distribution of social amenities and basic resources. We often read various reports calming big economic gains and some of them disagreeing.

GDP only represents total value that has been added while producing goods and services during a fiscal year. The negative part or the disadvantage of GDP data is that it does not include the informal sector and other social costs of negative economic factors. It is worth noting that neither income nor the expenditure contributes or measures the prosperity of the people from goods and services.

Unfortunately, uneven distribution of benefits does not translate into development, as large part of the population is not the beneficiary.
Thus comparison between GDP and Human Development Index make no sense, as they are totally two different facts. The widening gap between the rich and poor is very alarming.

Recently, financial market have been witnessing war or words on Pakistan’s growth number between MOF and the two well known top economist of the country, Dr Hafeez Pasha and Dr Ashfaque Hassn Khan.

I am shocked and disappointed that since last 10-12 years, we continue to focus and discuss issues such as Large Scale Manufacturing Sector, instead of discussing issues that has grown to alarmingly high in size. The size has become so huge that its spillover effect is unimaginable.

During this period size of our country’s economy grew by nearly USD 200 Billion from USD 80-90 Billion. Rupee weakened by 67 pct to 104.85. In 2008 Exports was USD 19.22 Billion and in this fiscal year end was USD 20.80 Billion. In 2008 total Debt (Domestic & External) was Rs 6.475 Trillion and as of now Rs 19.8 Trillion (External Rs 6.4 Trillion & Domestic Rs 13.4 Trillion). In 2008, annual Interest payment on Debt was Rs 642 Billion and now Interest + Principle Rs 1.49 Trillion.

For goodness sake, higher oil in past was one of the major reason, but do not over look that growth in remittances was at a much faster pace that negates higher oil bill. It is the faulty economic policies responsible that has caused economic mess. Artificially high food price since last 6-8 years in the name of food support price and then support in the name of concession/rebate is the cause of misery, which was well supported by weakening of Pak Rupee. It has not only inflated domestic food prices, it is one of the major causes of inflation.

Documentation of economy and specially Real Estate is nail in common mans coffin due to extremely High Rent and Real Estate Transacted Price. What we have been hearing about agreement on the methodology on valuation of immovable property is a mere joke if one time 2-5 pct tax is imposed for regularization of past transaction. This is one of the major causes of  Currency in Circulation reaching Rs 3.359 Trillion against Bank Deposit of Rs 10.06 Trillion.

Do we know that the National Average of Home Price in USA is USD 176.000/- and Median Household income is USD 58.641/-. Compare this with Real Estate piece in Pakistan. Pakistan is a haven/hub to park corrupt/illegal money.

In India, income from leasing and buildings is subject to 15 pct withholding tax levied on gross rent. Tax is credited against the taxpayer’s total income tax liability. However, taxable income is computed on the basis of actual rental value of the property or governmental determined rental value, whichever is higher.
While, capital gain tax realized from selling real property are taxed at standard income tax rates.

The real problem faced by our economy is that our economist/analyst/experts do not discuss the main issues that what has caused plunge in Private Sector Growth. If we take a deeper look and compare 10-year old Bank Deposit data, which are currently Rs 10.06 Trillion against Rs 2.8 Trillion in 2006 and Bank Advances reaching Rs 5.11 Trillion against Rs 2.2 Trillion in same period. It depicts true picture of economic growth disaster.

It clearly suggests that during period Banking Sector Advance/Deposit ratio was well above 75 pct, which is sharply down to below 51 pct. It implies that based on current calculation 10 pct is nearly Rs 1 Trillion annually. Imagine the negative impact on Pakistan’s economy, though in longer term calculation will differ to some extent.

Do we know the Economic cost of this faulty strategy ? Inflation was pushed to extremely high levels forcing sharp hike in Discount Rate now known as Target Rate resulting sharp increase in debt/debt servicing. During this period as compared to regional currencies Rupee has been substantially weakened.

Dead economic activity is the cause of fall in Tax to GDP Ratio, as collection on income fell sharply, forcing tax authorities to impose various types of indirect taxes to meet its target. To meet Revenue shortfall and avoid bank borrowing so that IMF deficit is met, SBP is compelled to inject funds through Open Market Operation (OMO) that has touched all time record high of Rs 2 Trillion on July 12.

Meanwhile, we failed to pick leaf from the global market, without realizing the size of damage it can cause. Since filing of bankruptcy by Lehman Brothers in September 2008. Central Banks around the world have cut interest rates a combined 661 times that has resulted negative rates in many of the major/large economies. It serves two purposes, stimulates growth and reduces the cost of borrowings.

Our Financial Managers needs to wake and accept the fact that they do not have a strategy/policy to financing annual deficit that has surged at a very fast pace and immediately slash PIB Coupon Rate by another 100-200 basis point to reduce unnecessary borrowing cost.

SBP is required to further gradually ease Target Rate by 75 to 125 basis point by the end of current fiscal year, as oil is no more a threat.

In its coming monetary policy, which is almost due, I will not be surprised if SBP decides to hold back on cutting Target Rate. This could be due to happy ending of IMF/Govt review meeting on its 12th and final tranche of USD 510 Million to complete its 3-year $ 6.7 Billion package.

Hence, if I am calling correctly, then I see bond yield correcting by 25-50 basis point from its current level, as quite a few traders are waiting to take profit. But demand for T/bills will remain intact, which should move ion 10-20 basis point band, as buyers will emerge.

However, slash in target rate by 25-50 points would mean, Central Bank is serious is reducing borrowing and may do some quick work instead of waiting for the fiscal year end.

(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 Oil Prices will not surpass $ 60-65

In my April 10 2016, Linkedin note “Future of GCC Economies” https://asadcmka.wordpress.com/2016/04/10/future-of-gcc-economies/

Then oil was hovering around $ 50. I wrote that in coming months there is a real threat of another sharp drop of oil prices. I strongly believe that oil will struggle to surpass $ 60-65 levels in near to medium term due to quite a few unfavorable factors, unless supplies get interrupted.
We are already witnessing supply glut and oil rig count has certainly bottomed out as the rig count is up by 41 in last seven weeks.

While, market has yet not taken into account the impact of Britain’s exit from European Union, though it is too early to make a judgment, but it will initially it will complicate UK growth trend.

Therefore, one thing is for sure, it will not help the cause and slowdown in Europe after Britain’s decision to leave EU will be unavoidable that would lead to more vulnerable global economic condition, probably a move towards recession will happen, as in all probability separation will spill over and would exhaust global economy.
Meanwhile, in 2nd quarter China’s economy grew at a slightly better rate by 6.7 pct though at 7-year low. Unfortunately, growth in China is not led by investment, which means state is injecting liquidity and deficit will rise.

We could see couple of more bounce back before exhausting, as government cannot keep on dumping money. This type of support/trend is not sustainable unless required structural changes are made.
Such type of forced stimulation package has many cost factors, as Its Central Bank, Peoples Bank of China has to easy policy rate to provide cheap funding. It has to lift or loosen restriction in banking sector, which is why in the month of May bank lending has jumped from USD 150 Billion to USD 210 Billion or Yuan 1.4 Trillion.

This means in all probability global economic slowdown has no stopping and unless supply gets choked, oil glut will remain a problem, as supply should exceed demand.

(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)

 

Pound could Plunge to 1.05 – Euro 0.9110 ?

GBP@ 1.2938 = The next move for Pound Sterling is completely uncertain. This is because there is so much uncertainty that n one knows that what will actually happen in coming months or years after Britain’s decision leave European Union.

UK’s political landscape after PM Cameron’s resignation has also changed. Another thing to watch will be if and when Article 50 is invoked, which is clause from 2009 Lisbon treaty, which will pave way for UK to exit.

Pound Sterling has already hit 30 year low. Now market will be looking towards Bank of England (BOE) that if it decides to cut interest rates and provide liquidity. It is because after the decision to leave EU, Fiscal targets gets tough and UK’s economic outlook is faced with more challenges.

Such a move could be possible to make UK goods more competitive that would add further pressure on Pound Sterling. This means Pound could test 1.20-22 zones against US Dollar and break of 1.18 could bring more misery for Pound Sterling, as in 1985 it fell below 1.06 levels, which cannot be ruled out, if UK unrest continues to haunt. So keep a good track of all political and economic moves for next direction.

What can cause further plunge of Pound Sterling ? The short term pain looks obvious, but any hint of recession could be the beginning of demise of Sterling. Market will also take clue from investor’s behavior after the invocation of Article 50. New General Election is another possibility that cannot be ruled out.

It seems that EU member are perusing for a quick decision. There is every likely hood that ongoing economic woes and continuation of trend could push investors to the wall and they will start fleeing, which can be large in numbers. This will be truly bad for the UK economy.

Meanwhile, nearly 4 Million voters have already signed petition to hold another context.

, there is another dimension and the leaf can be taken from the European precedent by ignoring the will of voters. In 2008, the Irish voted down the Lisbon treaty, which was adopted within few months. Similarly Greece, despite against all odds swallowed harsh bailout terms.

Brexit, is more about sovereignty than immigration, agriculture related issues or quotas. EU countries that normally respect its voters, as it listens to its population may come up with different ideas this time. Majority of its Parliament members, which believed in “Remain”, can stop Britain’s exit from EU by denying endorsement, as they have the right to disagree.

Only this can be the turning point for Pound Sterling, which could regain 20 pct of its lost strength or else, there is no bright spot for the British currency at the moment.

Is There Threat to Euro?

EURO @ 1.1048 = Unlike UK that enjoys best job condition since decade, as its unemployment rate has fallen to 5 pct is struggling after Brexit, EU countries too is faced with daunting task.

In contrast European Union has an average unemployment rate of over 10 pct, which is the result of maintaining tighter condition since 2008 and by hiking rates in 2011 it got worst. Its forceful austerity measures taken to lower down deficit and liquidity constrains added to European problems.

Unfortunately, the economic condition in 27-Euro economies vastly differs from each other and is faced with high debt problem, the risk of slow growth and recession is becoming visible.

There is a huge risk shaping up all over Europe. Scotland and Wales independence referendum is a big threat. Remember any European country that tries exit EU risks triggering another financial crisis, as common currency is proving to be pain for Euro-region managers. Minus Germany and France, the other EU members are unable to cope with strong European currency. Greece and Spain with 21 pct and 25 pct unemployment rate is hardest hit.

Euro has strong resistance around 1.1250-80 zones that should not surrender or else 1.1480, which is not a preferred scenario, but needs to fall below 1.0840 for 1.0680.

In Medium Term to long Term, a break of 1.0380 will trigger sharp fall towards 0.9880 and cracks in Euro-zone region could see plunge towards 0.9110.

GOLD @ $ 1366 = Gold is the major beneficiary after Brexit, gaining substantially. In my May 01 and June 24 note, I made strong recommendation to buy gold giving two targets $ 1380 & possibly $ 1450. This year, so far it has gained around 25 pct.

Delay by Fed in hiking rate after economic slowdown in USA gave added advantage to the safe haven commodity. This is why nearly USD 4 Billion have been invested in precious metal funds last week.

Though I am not a gold fan that offers nothing in return, but the ongoing UK and EU concerns will likely give boost to the Yellow metal in coming weeks. FED hike delay is also supportive for gold.

Hence, buy on dip remains a preferred strategy for some more weeks. Support is at $ 1310 should hold, unless $ 1250 surrenders Gold buyers will dominate for a test of $ 1440 or $ 1470-80 zones, where gold should exhaust unless $ 1540 surrenders.

(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)

Impact of BrExit on Pakistan Economy

Unlike most of the economies, Pakistani government refrained from making official comments on EU referendum or Brexit. Though Pakistan can claim to have historic ties with Britain, but over the years on economic front Pakistan could not make big stride due to lack of visionary economic policies.

Analysis of trade ties between the two-countries is the key to understand its economic impact if any (Risk/Reward).

One of the most pertinent issues that must be bothering business community in Pakistan is the need for immediate clarity that if there is change/revision in UK’s business strategy/policy or will the change occur once article 50 of the treaty of European Union is invoked, as Britain has 2-year time period to negotiate. Though, as per best practice, all commitments that were made before referendum should be honored.

Prior to referendum, EU was the guiding force on trade policies and negotiations, which were conducted by the European Union and this is complicating the issues, which should be quickly addressed.

In Pakistan, out of over 500 multinationals operating, it is estimated that there are more than 100 British companies operating in Pakistan.

Bilateral trade volume with EU is roughly around USD 11 Billion and trade volume against UK is little under USD 2.3 billion or 4th largest export market for Pakistan and is placed 2nd in net inflow in foreign investments.

In Britain there are nearly 1.2 million British Pakistanis. After Brexit, rules of doing business, education policy, visa policy etc may come under scrutiny and will change. Britain is already adopting tough stance on immigration, which could get even tougher.

CHALLANGES

Sudden changes in business environment are possible that could flip the ongoing flow, which should be temporary. Trade tariff and treaties, immigration laws will be amended and regulations will be modified. Hence, it can cause volatility that needs to be looked upon to handle short term and long term consequences.

On paper our macroeconomic fundamentals could be OK, but in reality damages may not be sustainable due to weak external position and fiscal indiscipline. It is because our near term and medium term firewall is feeble, as size the of outflow is next two years is huge.

POSSITIVES

Brexit also means Britain will free itself from European Union’s shackle and will no more be hostage to EU guidelines that will provide space for free and new trade pacts with its friendly countries giving space for enhanced cooperation.

It all may point to have negative impact on businesses, but with sensible and timely approach Brexit could potentially deliver positive result, as EU restrictions will be lifted that will open gates for genuine overseas trades. Historically, Pakistan has good relationship with UK and hence, could be beneficial if timely en-cashed.

Bottom line is that only policies will be amended and not the borders of UK and EU Countries, which means only trading pattern will change. Pakistan does not have significant operations in UK and therefore Brexit does not pose major risk to Pakistan’s economy.

Simultaneously, EU too could be boon to many new business openings to fill the gaps.

Bingo ! Bingo ! Bingo ! All Targets Hit..June 24

Bingo ! Bingo ! Bingo ! All Targets Hit……..

Start Booking your profit.

Next support levels….

GBP @ 1.3240 = 1.2540 if 1.278 surrenders
JPY @ 101.60 = Needs to break 99.40 for 97.20 & may bounce back. Another sharp move coming if 102.50-80 zones hold.
EURO @ 1.1023 = As long as 1.1180 holds break of 1.0880 will encourage for 1.0770
GOLD @ $ 1330 = Unless move beyond $ 1380 for $ 1450, risk for sharp drop

https://www.linkedin.com/pulse/currencies-gold-outlook-may-01-asad-rizvi?trk=hp-feed-article-title-publish

https://asadcmka.wordpress.com/2016/06/12/brexit-or-no-brexit-fate-of-currencies-gold/

As we get closer to June 23 no one can tell about BrExit Yes or No. Neither Politicians nor Predictor can provide straight answers as both will talk in favor of their own interest.

UK market is heading for uncertain period with many risks attached. Political and Foreign Policy Risk factor adds to country’s National Security Risk.

It will make Rest of Europe uncomfortable if UK decided to exit. Ireland could be clobbered as UK is its largest trading partner. Scotland too will melt because of its dependency and close trading relationship with UK.

Europe may be faced with contagion effect because exit will increase risk of Referendum Trend in EU Countries that could weaken Euro-zone. And more likely, BrExit will certainly add to the woes of respective governments of Germany and France in 2017 election.

The tug of war is between UK’s Business Community and those that believe that the pride of British people is at stake, as they consider themselves more Englishmen than European.

Business Community believes that EU membership helps in reducing trade barriers, as it allows Free Trade. It also allows free movement of its Capital and Labor.

While, exit supporters strongly believe that by joining of European Union they are not independent in making decisions as they will have o abide the EU Rules and Regulations.

The campaign led by David Cameroon has strong support from UK’s Business community backed by US President Obama. Whereas London’s former Mayor Boris Johnson leading BrExit Campaign is supported by the UK’s Anti-Immigration Independence Party.

UK’s “The Sun” reported that even Queen Elizabeth II backs BrExit, which was quickly denied by Buckingham Place.

However, there are many risks and factors attached to this debate, as disagreement is on immigration policy. They think probably allocation of agriculture quotas will put its farmers in disadvantageous position. Joining the Union of 5-Other Nation that includes Turkey risking control borders. Many Britain’s hates the idea of being controlled and regulated by the European bureaucrats.

If Britain decides to exit then Europe cannot escape from disaster, as other could soon follow and Scottish National Party may take the lead and could ask for another referendum on Union with UK that could increase risk of Scottish Independence. Similarly, North & Southern Ireland problems could pop up specially issues relating to trade.

 

GBP 1.4255 = Market would continue to wobble and witness choppy trading sessions until June 23. Euro too against US Dollar will come under pressure, but may regain some strength against Pond Sterling.

Swiss Franc will enjoy strength in crosses against both the currencies. Japanese Yen will the other currency to enjoy European unrest. Gold will find buyers on dip that could comfortable surpass $ 1300 and may get close to $ 1350 levels.

Pound, will continue to find regular sellers.

If you have followed my May 01, 2016 note and took Profit or Sold Sterling, as the currency was well capped below 1.4820, I would still recommend to wait to buy, as more losses is expected, as I am still not sure that how Bank of England will provide Cable the safety net, though there is one more BOE meeting due a week before the Vote. Banks are already told to prepare their contingency plan, which means possibly more trouble for the British currency.

However, I would suggest taking early profit or closing instead of opting for a bigger gamble. As “Yes” Vote will reverse the trend. Next level to watch is beak of 1.4140 and 1.3740 or 1.3220. While 1.4850 will be the key level to watch on the upside.

https://asadcmka.wordpress.com/2016/05/01/currencies-gold-outlook-may-01/

https://www.linkedin.com/pulse/currencies-gold-outlook-may-01-asad-rizvi?trk=hp-feed-article-title-publish

 

Currencies & Gold Outlook – May 01

Last week’s ECB & BOJ announcement confirms that they are done with easing policy for the time being. Lower expectation of ECB easing and weak inflation in Eurozone region has help helped Yield to make small gain that has supported EURO. Fed’s somewhat Dovish outlook further dampened USD’s upward momentum. However, since performance of Major economies is still below par, hence unless it makes reversal ongoing current Euro rally is likely to make some more gain before it exhaust. Market will wait to take direction from the release of US economic data.

While, surge in Pound Sterling is caused by comparatively better economic condition in UK and customer demand opting for a hedge, as BrExit referendum is due on June 23. However, this upward rally could soon halt. Market should be prepared for excessive choppy and volatile condition as we get closer to polls date.  Friday’s US non-farm payroll and unemployment data could be the game changer.

EURO @ 1.1440 = Support @ 1.1240 is the key, which should hold if 1.1320 surrenders. Howver needs to clear 1.1520 for test of 1.1590-20 zones.

GBP @ 1.4608 = Bullish rally in Cable is intact, but the run is probably in its last phase before it exhaust. In Medium Term top is around 1.48-50 zones, as crash could soon occur. Mover below 1.4220 will encourage for 1.3770. However, during the week only break of 1.4740 will encourage for 1.4820. Preferred strategy would be to pick the top for a test of 1.4340-80 zones.

JPY @ 106.80 = The expected move did occur, as per earlier recommendation made calling for for a quick 5-7 big figure drop. However, from here see Yen finding temporary support around 104.50-80 zones for a retest of 108.20 levels. In Medium Term strong support is at 110.50. Unless 112.50-80 zones surrenders, there is a risk of further Yen gains to test 100-102

GOLD @ $ 1292.40 = is likely to find buying interest around $ 1260-65 zones, as support is around 1235-40, which should hold. But I strongly recommend taking profit around $ 1320-50 zones and prefer to wait to pick top to sell as strong resistance is around $ 1380.

(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)

BrExit or No BrExit ! Fate of Currencies & Gold

As we get closer to June 23 no one can tell about BrExit Yes or No. Neither Politicians nor Predictor can provide straight answers as both will talk in favor of their own interest.

UK market is heading for uncertain period with many risks attached. Political and Foreign Policy Risk factor adds to country’s National Security Risk.

It will make Rest of Europe uncomfortable if UK decided to exit. Ireland could be clobbered as UK is its largest trading partner. Scotland too will melt because of its dependency and close trading relationship with UK.

Europe may be faced with contagion effect because exit will increase risk of Referendum Trend in EU Countries that could weaken Euro-zone. And more likely, BrExit will certainly add to the woes of respective governments of Germany and France in 2017 election.

The tug of war is between UK’s Business Community and those that believe that the pride of British people is at stake, as they consider themselves more Englishmen than European.

Business Community believes that EU membership helps in reducing trade barriers, as it allows Free Trade. It also allows free movement of its Capital and Labor.

While, exit supporters strongly believe that by joining of European Union they are not independent in making decisions as they will have o abide the EU Rules and Regulations.

The campaign led by David Cameroon has strong support from UK’s Business community backed by US President Obama. Whereas London’s former Mayor Boris Johnson leading BrExit Campaign is supported by the UK’s Anti-Immigration Independence Party.

UK’s “The Sun” reported that even Queen Elizabeth II backs BrExit, which was quickly denied by Buckingham Place.

However, there are many risks and factors attached to this debate, as disagreement is on immigration policy. They think probably allocation of agriculture quotas will put its farmers in disadvantageous position. Joining the Union of 5-Other Nation that includes Turkey risking control borders. Many Britain’s hates the idea of being controlled and regulated by the European bureaucrats.

If Britain decides to exit then Europe cannot escape from disaster, as other could soon follow and Scottish National Party may take the lead and could ask for another referendum on Union with UK that could increase risk of Scottish Independence. Similarly, North & Southern Ireland problems could pop up specially issues relating to trade.

 

GBP 1.4255 = Market would continue to wobble and witness choppy trading sessions until June 23. Euro too against US Dollar will come under pressure, but may regain some strength against Pond Sterling.

Swiss Franc will enjoy strength in crosses against both the currencies. Japanese Yen will the other currency to enjoy European unrest. Gold will find buyers on dip that could comfortable surpass $ 1300 and may get close to $ 1350 levels.

Pound, will continue to find regular sellers.

If you have followed my May 01, 2016 note and took Profit or Sold Sterling, as the currency was well capped below 1.4820, I would still recommend to wait to buy, as more losses is expected, as I am still not sure that how Bank of England will provide Cable the safety net, though there is one more BOE meeting due a week before the Vote. Banks are already told to prepare their contingency plan, which means possibly more trouble for the British currency.

However, I would suggest taking early profit or closing instead of opting for a bigger gamble. As “Yes” Vote will reverse the trend. Next level to watch is beak of 1.4140 and 1.3740 or 1.3220. While 1.4850 will be the key level to watch on the upside.

 

 

https://asadcmka.wordpress.com/2016/05/01/currencies-gold-outlook-may-01/

 

https://www.linkedin.com/pulse/currencies-gold-outlook-may-01-asad-rizvi?trk=hp-feed-article-title-publish

 

 

(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 2016-17)

On June 03 2016, government will announce its Financial Budget (FY 2016-17).  Let’s analyze and discuss some of the key facts that drive Pakistan’s economy.

The truth is that except for those directly involved in business, there is hardly any enthusiasm or interest amongst the general public about coming annual event.

It is because, though Budget Policy Makers of Past/Present Governments discuss issues with business communities, but never disclose/share about its priorities.

While, Pakistani population is exploding, but the pattern of allocation and spending always raises intriguing questions, as area of prime concern such as education, health, welfare and all other matters pertaining to social sector never get the required attention.

BUDGET – MISERY or FLAW
If we define Government Budget and its implement in larger National Interest, the sole purpose of Budget is not only to bring forward the combine spending and receipt of all Federal activities. It should also provide Economic Policy Guideline so that it can influence the economy.

No matter when preparing a Budget, resources are always scarce, but at the time of Budget Formulation it is government’s responsibility to make all out effort to increase Revenue Collection and simultaneously Allocate Funds efficiently by providing protection to Private Sector.

There are three types of Budget, Balance Budget, Surplus Budget and Deficit Budget. Over the past several years, Pakistan is unable to increase its Revenue Collection and generate enough income from its Exports due to Policy Flaws resulting higher spending than receivables.

This situation has compelled to deliver Deficit Budget causing severe liquidity crunch (US Dollar & Rupee).

In Pakistan, Documentation of Economy is a non-serious issue that badly hinders progress at all levels, as respective governments are too lenient on tax evaders for reasons well known to them.

The economic impact of undocumented economy is so huge that it has destroyed country’s financial system, whereas it encourages corruption, nepotism and favoritism.

COMPLACENT ATTITUDE
Apparently everything looks quite normal. While the Budget is knocking at the door, the lawmakers are least worried, as there are no serious economic negotiations going on between legislators, business community and the government.

There is a possibility that government is comfortable because of the following.

-High comfort level is probably because Foreign Exchange Reserves are around USD 21.5 Billion, which seemingly does not threaten imports for the time being.

-According to Pakistan Bureau of Statistics unemployment rate got better to 5.9 pct from 6 pct.

– National Literacy rate climbed to 60.7 pct in FY 15-16 from 60 pct in FY 13-14.

-Sharp fall is expected in Inflation rate, which should drop to around 3.10 pct.

-By Fiscal Year end, Remittances will comfortably surge beyond USD 19 Billion.

-Revenue collection is likely to hit Rs 3.1 Trillion target after imposition of mini budget and SRO’s, as government priority is not on source of collection, which is at pathetic low.

-GDP growth against target of 5.5 pct target will be short by 0.7-0.8 pct due to poor performance in cotton sector on which government has no control.

-Stock market is fueling surge of optimism, which has touched all time high. But stock market boom is a misleading indicator, which is misrepresentation of economic recovery.

History suggests that neither stock market boom contributes towards growth nor its crash has any lasting impact on economy. Plummeting share prices only makes noise and news headline because financially rich individuals and strong institutions are directly affected because of equity holdings that could be investors, banks, or institutions.

Government does care about the individual gains or losses. Individual investor’s contribution only helps to inflate the volume in size.

This is why the national savings ratio is too low and debt is rising at alarmingly high pace, investments are on constant decline. It all indicates that there no economic healing.

CAUSES of POVERTY
A sad reality and a dirty truth is that our political agenda deprives nation from its basic needs. Unstable social and economic environment linking to its freedom is the hindering factor limiting choices, causing poverty to rise and the size of ever growing income inequality inflating.

Immediate question that comes to mind is when political agendas deprive major part of the population from exercising its full right, how can nations develop/grow? Frequent occurrence of our problem is the result of “Power Elite-Model” and adaptation of failed “Pluralist Model”, which does not represent real democracy.

In Pluralism, power is distributed amongst selective groups that include collation partners of likeminded people, professional associations and business lobbyists, but again this section in divided into two-groups, which represents Pluralist Model.

One is “Insider” that is well connected and always represents the government and its stance, while the other group is known as “Outsider”, which is less connected and do not have easy excess to meet the top hierarchy.

Power Elite-Model is Power Elitism that surrounds around nation’s wealthy or filthy rich tribe, limiting distribution of power to a very selective group.

Hence, in Pakistan combination of “Power Elite Model” and “Pluralist Model” has pushed the Nation and Economy in Disarray. People are left with no choices, as they do not have genuine access to basic needs such as food, water, health, education, clothing, shelter, etc. This is why rising poverty trend is very alarming.

ECONOMIC DEPENDENCY
To meet its financial requirements Pakistan’s economy is at the helm of donors. If it does not get nod from various agencies and do not borrow funds from overseas, the economy will get burst.

The biggest problem is unending borrowing need/urge that has pushed Deficit to an extremely dangerous zone. This is because total spending is greater than income, resulting ballooning of deficit, as no serious effort is being made to reduce dependency.

It is no more a minor issue or not cause of concern. It is the only available recipe for any government to survive. In a boarder perspective, if we take a deeper look at the past and present pattern of economic data, borrowing graph will suggest that our economy would have or will collapse if we refrain from Foreign Borrowings.

Present government is enjoying its third term, unfortunately during its all three terms (including current), Governments Budget measure have never helped economy to move from negative to surplus zone.

The causes of overall poor economic performance by respective governments are due to deficiency of powerful vision, lack of focus and directionless policy.

Extremely slow pace of growth in industrial and manufacturing sector and out of date agriculture technology/policy are further causes of Economic Misery. Growth data showing uptick in industrial and service sector or in mining sector is tiny and not very helpful.

It is because despite financially this being the best period of present government due to large oil savings of nearly USD 14 Billion in 20-months in its oil bill, it could not bring much needed positive shift in economic sentiment.

ECONOMIC SPOILER
Ongoing practice of Food Support Price and then further granting rebate to protect exporters from losses is a double whammy. Pushing domestic food prices artificially higher and making it costlier than the international market price for political gains is moral evil.

Such opposing theories questions law maker’s credibility and commitment towards nation. It is one of the major causes of decline in performance in agriculture sector, which makes them uncompetitive in international market.

The purpose favoritism/leniency is obvious, which is at the cost of nation and tax payer’s money. Only a small segment of growers/farmers are the real beneficiary. By not artificially adjusting food support prices, instead of few thousand benefiting, major part of the population (190 Million) would be the net gainer, as price easing will help domestic food prices to fall to its original cost level.

In its 3rd term, it is noted that government is often quick to shift responsibility on external factors instead of taking responsibility for making wrong decision.

This is in context to fall in global commodity, which is blamed for poor exports are untrue. When global commodity is in down trend since last 5-years then why food support price was not adjusted accordingly. Higher prices caused spike in inflation and exerted pressure on Rupee.

Now cotton sector is blamed for fall in exports. Why did everyone opt to keep quite when erroneous decision was made? Why they did not protest at the time of purchase of poor and un-certified seeds? Same goes with pesticides and fertilizer. At decision making time, why concerned authorities did not act?

In coming year, the nation could be heading for another Agriculture Sector Disaster, as reports are coming that approval has been given for Genetically Modified (GM) seeds for growing Cotton, Wheat, Sugarcane etc.
Committing or repeating of such blunder should be avoided, as repetition of such practice will never allow the nation to come out of struggling mode.

Unless stringent laws are made to hold all such corrupt and notorious elements responsible for causing losses to the National Exchequer, disaster is unavoidable.

Another major area of concern is Documentation of Real Estate transaction at a false price, which is sucking blood from economy.

The size of money involved in construction business is so huge that distorts all economic data. In many ways it promotes corruption and nepotism and unless corrected or checked economy will remain in doldrums.

WHY ECONOMIC INCENTIVE BACKFIRES
Absence or lack of accountability is the cause of economic sufferings. In institutions, concept of fines and reward is considered motivation factor. Trend of performance based incentive in banks/corporations encourages staff to outshine and do extraordinarily well.

But experimental economist argues that they have also experienced that imposition of fines have reduced ethical obligation to avoid inconvenience.

Despite both the factors, I think those responsible for causing colossal damage to the exchequer should be taken to task.

I do not have enough reasoning to highlight that since ages why or how Pakistan has developed the habit of borrowing from Donor agencies.

However, it is estimated that the country has so far availed loan facilities nearly 18 times. In 1958 Pakistan IMF sanctioned loan facility of SDR 25 million, equivalent of USD 24.8 million, which was cancelled due to non-utilization of limit. 1st time that Pakistan got seriously engaged with IMF borrowings was in 1988. Then it borrowed around USD 516 million.

Furthermore, in last 25 years, Pakistan was able to Privatized 176 entities and received nearly USD 6.5 Billion, which are peanuts. I do not have the output data and economic contribution, but Pakistan’s outflow of profit and dividend is well above USD 2 Billion annually, while net inflow of Foreign Investments is substantially low.

The overall cost of poor cash management is that Pakistan’s debt has surpassed Rs 20 Trillion marks and its servicing cost is beyond Rs 1.3 Trillion. Annual Circular Debt averages around Rs 250 Billion and Tax to GDP Ratio is Pathetically Low.

CAUSE OF WORRY THAT NEEDS ATTENTION
-After September, are we done with IMF or Government will have yet another go?

-Ballooning Debt and Debt Servicing is alarmingly high. What measures will be taken to reduce Domestic Debt and its Financing ?

-For how long Pakistan will continue its Foreign Currency Borrowing Policy ? When will it end and what is Repayment Arrangement/Strategy ?

-Governments Food Support Price Policy and then Rebate on Exports. How does it contribute to Economy when Support Prices pushes Domestic Prices Higher than International Market Price ?

-Tax to GDP Ratio is at alarmingly low level. Why all Income are not Taxed ? What are the Hindering Factors if any ?

-If Pakistan is able to produce average 20.000 MW of electricity daily by 2018, then what will be source of USD funding to purchase excess oil for production ?

-If electricity production reaches 20.000 MW, then Circular Debt is likely to surpass Rs 400 Billion annually due to leakages and line losses. What is the plan to plug this monstrous number ?

-After Production of 20.000 MW of electricity, what is the Estimated Economic benefit in terms of Employment, Exports and Revenue ?

-Exports are suffering, since last 6-years what serious measures will be taken to increase Exports and what is the Export Target Number ?

-After oil price collapse, oil producing countries are faced with tough domestic condition due to deficit. What is the contingency plan to counter possible drop in remittances inflow and job losses in oil producing countries ?

(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)

Bingo ! Policy Rate Cut by 25 bp to 5.75%….

I am glad that I am the only Analyst in Pakistan that had predicted Policy Rate, cut 3-days ago (May 18). When I gave my argument for Policy Rate cut, Banks Treasury Heads/Analyst/Economist totally disagreed with me and there were raised eyebrows.

However, I still believe more rate cut yet to come, as there is no change in my reasoning.

T/bills and Bonds are looking good for another big rally from next week onward.

Here I am quoting what I said on Wednesday may 18, which is available on link below………

“Therefore, in all probability, rate hike is not expected any time soon, not even in 1st quarter of FY 16-17.

In fact rate cut is still a favorable option that will help to reduce cost of debt financing and simultaneously will help to reduce cost of doing business to stimulate economy.

Hence, in all probability, T/bills and Bonds yields will gradually ease, as corporate demand will add buying pressure”.

https://asadcmka.wordpress.com/

https://www.linkedin.com/pulse/why-bond-auction-scraped-asad-rizvi?trk=pulse_spock-articles

Why Bond Auction is Scraped ?

Today State Bank of Pakistan announced scraping of Pakistan Investment Bond’s auction, which is second time in 3-weeks. Earlier on April 27, SBP rejected T/bills auction. SBP does not give reason for rejection.

Tough demand in both, T/bills and PIB auction has been strong, but the message is very clear that SBP/MOF is not comfortable giving higher cutoff that does not reflect Central Banks accommodative stance.

It makes little or no sense that banks have been demanding better return than the 6-month average KIBOR rate, which is around 6.27 pct that could be one of the causes of scraping of T/bills at an earlier date. In its last T/bills auction SBP accepted all bids that was closer to KIBOR rate.

After giving clear signal to the market in its last PIB auction, policy makers must be excepting similar bid pattern trend in today’s PIB auction.

But prior to Bond auction few banks made desperate effort to jack up yields sharply by offering sale of T/bills and Bonds at higher yields in small amount hoping that market will bid Govt Paper at higher yield. It was bad idea that has backfired.

With Open Market Operation (OMO) injection amount of Rs 1.32 Trillion costing 6.05 pct, investment at current levels are not attractive for investors due to nominal return. Financial Institution’s desperate bidding pattern is understandable as they are holding large size investment portfolio, hence the appetite for government paper must be very low, as interest rate risk is another matter of big concern.

Market is basically betting on expectation that government is left with no other choice and will be forced to offer lucrative return on investments to contain its fiscal deficit target. They are also of view that SBP has no other alternate option to reduce OMO injection, which has been hovering around Rs 1.4 trillion for quite some time and will succumb to pressure.

However, market should be aware that oil savings of nearly USD 14 Billion in last 18-20 months means reduction in liquidity requirement since then that has gradually reduced by nearly Rs 1.45 Trillion due to lower oil bill and more importantly it is not only banks that are holding government paper. Total Non-Bank Holdings of GOP Securities is Rs 1.535 Trillion. Not all, but sizable amount of their holding is also maturing in short term, which means, corporate demand could suddenly pop up.

Therefore it’s a win-win situation for SBP/MOF and for the first time they can afford the luxury of refusing to accept market demand for higher yield.

Finance Minister Isaq Dar on numerous occasions has spoken of higher cost of debt. Soon after his return from Dubai after meeting with IMF, FM in his press talk has clearly said that he is expecting inflation to close around 3 pct by Fiscal Year end. I have several times pointed out in my write-ups that I am expecting inflation to close around 3.10 pct by end of June and I stick to my target.

There is a clear hint that the government is extremely concerned with the pace of rising debt, which is not manageable until there is substantial rise in Revenue Collection and surge in Exports and with slow down of growth pace of remittances, all three are indicative of the fact that the pressure on debt will continue to mount, which will keep on surging unless checked immediately.

Whereas, market cannot dictate its terms to SBP, as still have quite a few monetary tools in its sleeves. SBP can widen the corridor gap or even remove corridor at a later stage, it can slash target rate or leave inter-bank market liquid.

I am quite confident that the government will not go for another IMF deal after receiving its September tranche. While talking to press FM Dar has shown aggression projecting 6 pct to 7 pct growth in next couple of years. Govt says it will add another 10.000 MW electricity by end of 2017. With such ambitious target government has to tame down and reduce cost of doing business higher so that businesses can become competitive.

Therefore, in all probability, rate hike is not expected any time soon, not even in 1st quarter of FY 16-17.

In fact rate cut is still a favorable option that will help to reduce cost of debt financing and simultaneously will help to reduce cost of doing business to stimulate economy.

Hence, in all probability, T/bills and Bonds yields will gradually ease, as corporate demand will add buying pressure.

 

Currencies & Gold Outlook – May 01

Last week’s ECB & BOJ announcement confirms that they are done with easing policy for the time being. Lower expectation of ECB easing and weak inflation in Eurozone region has help helped Yield to make small gain that has supported EURO.
Fed’s somewhat Dovish outlook further dampened USD’s upward momentum. However, since performance of Major economies is still below par, hence unless it makes reversal ongoing current Euro rally is likely to make some more gain before it exhaust.
Market will wait to take direction from the release of US economic data.
While, surge in Pound Sterling is caused by comparatively better economic condition in UK and customer demand opting for a hedge, as BrExit referendum is due on June 23. However, this upward rally could soon halt. Market should be prepared for excessive choppy and volatile condition as we get closer to polls date.  Friday’s US non-farm payroll and unemployment data could be the game changer.

EURO @ 1.1440 = Support @ 1.1240 is the key, which should hold if 1.1320 surrenders. Howver needs to clear 1.1520 for test of 1.1590-20 zones.

GBP @ 1.4608 = Bullish rally in Cable is intact, but the run is probably in its last phase before it exhaust. In Medium Term top is around 1.48-50 zones, as crash could soon occur. Mover below 1.4220 will encourage for 1.3770.
However, during the week only break of 1.4740 will encourage for 1.4820. Preferred strategy would be to pick the top for a test of 1.4340-80 zones.

JPY @ 106.80 = The expected move did occur, as per earlier recommendation made calling for for a quick 5-7 big figure drop. However, from here see Yen finding temporary support around 104.50-80 zones for a retest of 108.20 levels.
In Medium Term strong support is at 110.50. Unless 112.50-80 zones surrenders, there is a risk of further Yen gains to test 100-102

GOLD @ $ 1292.40 = is likely to find buying interest around $ 1260-65 zones, as support is around 1235-40, which should hold. But I strongly recommend taking profit around $ 1320-50 zones and prefer to wait to pick top to sell as strong resistance is around $ 1380.

(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)

T/Bills & Bond Traders are Caught Wrong Footed

Asad Rizvi @asadcmka 

Correction in PIB/T-bills Yield was obvious after the release of SBP Monetary Policy Statement suggesting that CPI has bottomed out.

However, a powerful statement was conveyed to market through MPS by the new team comprising of 9-members of Independent Monetary Policy Committee (MPC) empowered to take decision on all matters pertaining to monetary issues that has replaced previous Advisory Committee on Monetary Policy.

Recent surge in PIB/T-Bills yield in inter-Bank market was overdone, as market probably misunderstood the message and reacted in hurry. Though MPS opted for a stronger language conforming that inflation has bottomed out, but it never hinted change policy stance.

Prior to MPS, T-bills were hovering around 6.20 pct and 3, 5 and 10 year PIB yields was around 6.30 pct, 6.68 pct and 8 pct respectively. Suddenly market yield popped up by 30-40 basis point.

Since last week market was offering T/bills in medium to sizable lots 5-8 basis point above last cut off. But off loading of PIB’s by couple of banks in the absence of commercial demand gave market jitter that yield would further make sharp surge.

Another growing perception in the inter-bank market is that since Government Paper amounting to Rs 1.5 Trillion is maturing this year, hence, banks are now enjoying dictating terms.

This is why in today’s T-bills auction, bid pattern will suggest that banks teased MOF by offering amount in large lots at a very high yield hoping that they will succeed to invest at a very high yield.

SBP on behalf of MOF announced rejection of auction giving very clear message that nothing has changed. Inflation is picking up, but not at alarming pace.

Though oil prices is up and Ramzan is due in next 40 days, but I am very clear on inflation that it is likely to stay around 3 pct by end of June and between 3.5-3.75 by end of December 2016. So there is nothing to panic about.

My view on oil remains bearish and I do not see average oil prices surpassing USD 50 this years. I am rather waiting for Kuwaiti supply, which will soon flood the market with oil glut, as strike is over. Kuwait production was down by 1.7 million barrel, which will once again be producing at maximum around 3.15 million barrels per day by June and hence, I am not ruling out another sharp drop in oil prices.

Interestingly, today’s rejection of T-bills auction will give market a good lesson that it is not on the driving seat. All SBP has to do is keep market liquid, bond and t-bills will yields will make natural adjustment.

Market has to realize that Total size of Bank Holdings of Govt Securities is Rs 6.433 Trillion of which T-bills are Rs 2.614 Trillion and rest are PIB’s and Ijara Sukuk (GIS). Hence it’s not T/bills or Bond traders call as they are not on the driving seat. They are totally dependent on the Central Bank’s liquidity management policy, or else banks will have to make large corporate lending, which they won’t. Return on Govt Paper is still too attractive at current levels.

Cost factor is the major concern of SBP and MOF. One percentage point means Domestic Debt costing another three-quarter of a billion US Dollar or increase in debt by same amount.

While, I do not rule out further rate this year, which suits our economy, as inflation is no more a threat. Look at FED, despite decade old nearly zero interest rate policy it is still in no mood to hike rates because of fear of impact of rate hike that can cause damage to its economy. Similarly Japan have been struggling since more than a decade and now Europe too opted for same strategy/

Pakistan also cannot afford luxury of higher policy rate due to Revenue shortfall, declining trend in Exports and in anticipation of possible pressure from overseas Pakistani. Deficit Financing is a pain in a neck.

No pressure will be exerted on exchange rate. We have witnessed Pakistan’s interest rates dropping to almost half. Rupee remained stable for obvious reason as for carry trade purpose PKR is still too attractive due to favorable interest rate differential.

Tomorrow I am excepting sharp reversal of T/bills and PIB yields and I will not be surprised to see 10-year bond making sharp gains to break 8 pct yield in coming days/months

IMF & Structural Economic Reform

                      IMF & Definition of Structural Economic Reform

Asad Rizvi @asadcmka

In Pakistan, one of the major causes of economic downturn is the history of involvement of the elitist that has all the time dominated at the highest circle. The power elite model is a complete failure, as it did not contribute enough to match population growth pace, it has increased poverty rate, pushing illiteracy rate higher, worsened health care condition and causing social unrest.
Today, tough the country is blessed with large lot of younger population, but the cause of economic misery is lack of industrialization and outdated agricultural technology.
In true sense, the nation is not aliened to engage itself with the process of globalization. It has certainly failed to counter two other major challenges, energy scarcity and climate change.
Unfortunately, it is due to Hierarchical Control System that despite our country being blessed with wide range and abundance of natural and other resources, Pakistan’s economy is totally dependent on Foreign Capital.
It is simply because the Command Hierarchy opts for a preferred policy of their choices resulting pocketing of largest portion of wealth that simultaneously has helped in promoting Nepotism and Corruption.
Hence, they are the Real Spoilers of Pakistan’s Social and Economic Indicators/Models, as the History of Hierarchy Control would suggest that the chosen few from the same lot are most of the time engaged at different levels.
Take an example of group of people often chosen to represent “Monetary Matters”, or matters pertaining to “Fiscal Issues” or have a look at Group of Experts and Planners invited to prepare and provide feedback on “National Budget” issues.
Interestingly, expect for one or two new faces new names are not involved in Budget preparation. Old faces have been part of the process since decades. After the Budget announcement, they are the ones mostly found snubbing government policies, probably because their direct or indirect interest is not protected.
This is 3rd year in running for the present government to prepare its National Budget (2016-17). If the present Government seriously means business, they should adopt sensible strategy to introduce new faces with new ideas/plan and make an effort in their coming budget to minimize and overcome economic burden, as input of all past committees have been well short of targets. With a serious note, this continued weak input should be highlighted in print and electronic media.

Structural Economic Reform

“Structural Economic Reform” is a very common term, which is frequently used by almost everyone. Economist/Politicians/Planners/Think tank are of view that strategic shift through structural economic reform can bring positive and desired economic and social changes for the well being of the nation.
By definition the term is wide and very confusing. It is also very common in our country and is frequently used in context to IMF assistance, which is the easiest way for every government to get money without being accountable to the nation. Pakistan has so far approached IMF on 8 occasions.
Structural Economic Reforms can necessitate changes to government working strategy, but they are extremely difficult to analyze or describe its type. This is why IMF phrase “Structural Changes Vital to Successful Development” is a common term often used in Pakistan, but it is a perplexed clause when applied.
-To illustrate my view point, until past and present government’s tenor, funding of Circular Debt would always hit and inflate Fiscal Debt number, but suddenly in recent times IMF made a big policy change and thinks otherwise. If my argument is not acceptable then why in previous years, Circular Debt payments was added to the Fiscal Deficit number inflating the data and now it does not ?
-Government is not suppose to borrow directly from Central Bank, but is allowed to use backdoor, as Central Bank can fund banks through Open Market Operation (OMO) encouraging banks to buy lucrative Government Paper to meet its funding shortfall. Why does it instead encourage window dressing, which is against norms ?
-Thirdly, IMF wants industrial expansion, as it is of view that economic growth is critical, it also wants to improve human capital skills to enhance productivity, but at the same time it demands austerity. Then how is it possible when liquidity is intentionally drained out and corporate lending is discouraged? Advance/Deposit Ratio dropping to around 50 pct justifies my argument of private sector slowdown.
-Further, in Pakistan’s case only 10 pct of the IMF funding is allowed for debt related payments and the remaining balance amount is placed with Bank for International Settlement (BIS) or other agencies. The impression given is that holding of IMF money fattens country’s Forex Reserves.  Over here, who is the beneficiary ? Pakistan that cannot spend IMF loan according to its need or IMF that has succeeded in conditional lending. Spain and Italy snubbed IMF when it offered conditional lending demanding austerity measure.
-There should not be any disagreement to IMF demand of economic stimulation policy. But there is a clear policy conflict. Its major demand is to contain deficit, which is not possible without putting a slash in bank lending. Then how can economy expand by further choking banks by draining out injected liquidity (OMO) to sell Bonds/T-bills ?
-Is IMF complacent approach not questionable that despite our exports falling since last six years due to sharp fall in commodity prices in international market, IMF does not demand from Pakistan to do cost and benefit analysis? Why IMF does not ask government to refrain from support price policy, which is clearly state intervention and not as per international market practice?
-Is IMF not aware that due to consumer unfriendly food support price policy, food prices in Pakistan are already overvalued by nearly 30 pct making life of common man miserable? Prices should be aligned in line with international market price to support its ailing exports so that it can capture its lost market share. It will serve two purposes. Reduction in artificially inflated price will ease domestic food inflationary pressure and give much needed boost to exports.
-Why IMF has adopted dual stance ? It is compromising on weak Revenue Collection, which is at alarming low level in terms of Tax to GDP Ratio. But it is least bothered when Mini Budget is introduced to fill gap that adds extra burden on the larger part of the population ?
-Why IMF is not responsible for drop in Tax to GDP Ratio when private sector spending is curtailed to contain deficit resulting weak revenue collection?
-Why IMF does not consider breach of 60 % Fiscal Responsibility and Debt Limitation Act (FRDL) a serious issue ?
-Why IMF does not change its priority list putting taxing of all income on top of its list and by putting Privatization behind ? This is amusing and confusing too.
I have listed some of the facts and would remind IMF about its deregulation policy, as most of the issues discussed above fall in its ambit.
My intuition is that such ongoing borrowed policies will never bring positive and desired result, unless drastic changes are applied at all levels.
Therefore, it is imperative to bring imminent changes in the current monetary system and its economic model.
Start by getting rid of Feudalism that has economic roots that is spread all over the system to be followed by revamping of country’s education system that should top the priority list. This cannot be done without substantial increase in spending on Education by allocating good part of money, which should be 6-8 pct of GDP. Though many would argue that it’s a Provincial subject, but lead has to be taken for a big leap. There is surely unending list of things to do.

 

 

http://www.brecorder.com/articles-a-letters/187:articles/1166850:imf-challenge:-government-must-pay-back-borrowed-funds?date=2015-03-30

(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 Panama Connection & Global Tax Avoidance   

Pakistani connection to the “Panama Papers” is the hottest topic in Pakistan. There is long list of names and more is yet to come. Right now it is a politicized affair in our country rather than anything else because leaders are not keen to address or debate and correct real issues such as corruption, dishonesty, illegal acts, unethical conduct, wrong doings, bribery or embezzlement, which is the leading cause of unrest and economic misery.

However, it was courageous though not sure if intentional or unintentional move by the anonymous source who leaked 2.6 terabyte papers more than a year ago, without fearing that sender can easily be reached, as escaping on such matters is no more possible in this modern era.

The data base is bigger than WikiLeaks disclosures that contain Transcriptions, Contracts, Scanned Documents and E-mails. The leak paper material consists of 320.000 Text Documents, One Million Images, 2-Million PDF’s, 3- Million Data Entries and 4.8 Million E-mails.

Per Panama Leak in Pakistan, so far there are nearly 200 names, but it seems that the interest is not to get rid of the decomposed part. Instead politicians are more focused to gain political mileage.

However, since the pressure is immense, this is good opportunity to remove the gravel and reach the point to determine truth and expose many of the wrong doings if any.

Government is currently faced with a very tricky situation and opposing parties are quite determined to set the trap by legal means. Hence it is very a challenging task to get right type of combination for professional investigation.

With due respect to all, Commission consisting of Supreme Court Judge or Judges (Active or Retired) teaming up with FIA, NAB, SBP & FBR members will be incomplete without the inclusion of an experienced committee member having operated in Bank Treasury/Treasury Operation that will have to play major role to in Reconciling Foreign placements/entries. While all members can make valuable contribution to a certain extent because of their limited knowledge on subject

I do not believe that Forensic Auditor hired from abroad can add 100 pct value. For money trail purpose, a competent Experienced/Expert having worked in Bank Treasury and Treasury Operation having knowledge of Pakistani market and international market environment can contribute nearly 50 pct to Reach Rock Bottom and find the unattended core problem.

I can name one such person. Mr. A B Shahid having worked in Pakistan and International market and has vast knowledge of the particular subject and is the most suitable/appropriate person for this job. He has the experience of working as Treasury Head, he is well aware of matters pertaining to Treasury Operations, he has good grip on Foreign Reconciliations/Entries. Mr. A B Shahid also has Treasury Audit experience, which could be added advantage.

My question is that is this serious issue or a futile exercise? And if yes, then let’s see who will bell the cat ?

Tax Avoidance Issue at G-20 Leaders Summit

In a very latest move it has been decided to take up tax avoidance issue at G-20 Leaders Summit due in September in China that refers to links with offshore firms. UK, Germany, France, Italy and Spain have agreed to share data. If USA decides to join the bandwagon, then this critical issue will surely attain some level of success.

Panama Paper/Leak is just one particular firm, as globally there are uncountable numbers of firm that may be in the knowledge of selective lot involved directly or indirectly in this business.

For a moment I want to deviate from this topic to gather some evidence before I come back with stronger argument to prove my point.

When disastrous economic number worsens and data inflates to reach an alarmingly high level, countries even fabricate data to seek legitimacy to attract investments and avoid downgrading. Greece and some of the African countries are good example.

During Euro-zone crisis, rating agencies acted no differently and its stance was visibly surprising. Debt ridden ECB countries that do not have the ability to pay back loans were given tailor made concessions/opportunities, which suited their economic conditions. Greece for example owes USD 270 Billion to international creditors and yet has been blessed with funding with longer maturities.

Here are few number based examples for discussion sake. The overall size of the global economy is USD 78 Trillion. One of the recent survey/report suggested that Government Debt of 20-industrialized countries is USD 44 Trillion and if pension and retirement liability is added the amount is nearly three times higher.

Similarly, estimates are that the total size of global debt has surpassed USD 232 Trillion mark or 300 pct of the Global GDP, advance economies (USA, Japan, Europe and UK) is unable to generate income, as they do not have a choice and is stuck between good and evil, i.e., growth and deficit. Hence they are unable to stimulate their economies aggressively and have to curtail spending.

While, the major purpose of Quantitative Easing (QE) funding or cheap lending was/is Bank Capitalization and Deficit Financing, as the purpose of cheap lending was/is not to spur growth or inflate corporate balance sheets.

This is why so called Major Advance Economies have formally compromised to survive by means of Digital printing by keeping interest rates low, as it helps the size of Debt to inflate at a slower pace causing low global growth.

Another worrisome major indicator is the size of Over the Counter Derivative (OTC), which according to Bank for International Settlement (BIS) is USD 553 Trillion or nearly 740 pct of GDP.

Keeping in view the above data, it is interesting to point out that some of the recent data working suggests that creation of every debt produces 20 pct of growth or in ratio terms it is 5:1.

According to FED data approximately USD 1.45 Trillion in circulation was in notes. It is estimated that nearly 65-70% of the cash amount in US Dollar is outside USA. Total Circulation of Money around the globe is roughly around USD 5.2 Trillion. Value of NYSE is around USD 15 Trillion (Capitalization) is on paper.

To sum up my argument based on above data, I would never argue it is only because of structural weakness. The accommodation is intentionally done with a purpose blaming structural weakness. Global Market is highly leveraged due to incompetency/favors. Income/Revenue shortfall has reached the point of no return resulting frequent volatility in the global financial sector.

The pondering question about the Global Financial market is that when major industrial nations are loaded with debts in Trillions of US Dollar then who the ultimate beneficiary is?

-Where has all the money disappeared?

-What about Anti-Money laundering Checks?

-What about the success rate and responsibility of Customer Due Diligence?

-How effective has been anti-money laundering regulation?

-What went wrong with the Electronic Verification that prevented verification of financial transactions?

-Should the world believe that Regulators are unaware of Tax Havens/Offshore Exposure and has no knowledge of Global Offshore Industries?

-Why every cheque presented in bank should not contain Tax Identification mark so that every penny gets clean?

 

Crazy Pakistani Predicted Oil $ 25 in 2014 !

https://asadcmka.wordpress.com/2016/01/17/crazy-pakistani-predicted-oil-25-in-2014/

(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

 Future of GCC Economies

GCC is quite a diversified economy that has many extremes, as faced with plenty of challenges due to oil price collapse that accounts for almost 55 pct of the nominal GDP. Murky geopolitical condition in the Gulf region makes it further vulnerable.
M/E economies are in a fix due to pressure mounting from deficit. For e.g., the average subsidy given to energy sector is around 45 pct to push industrial/manufacturing sector growth, but smaller businesses surely provides more opportunities, as they do not require training and skills.

Though, the job market condition in this region is already poor for the locals due to various unfavorable factors, but focus on localization may add further pressure, whereas, corporations has almost fixed and calculated expense and opportunities.

Immense economic pressure compelled Gulf policy makers to impose taxes and duties on some of the products and further plan to introduce value- added tax (VAT) in 2018 that could yield nearly 1 pct of GDP in Fiscal Revenue. They have raised gasoline prices substantially. UAE will charge departure exit tax from passengers.

This is surely not enough and sustainable for the Middle Eastern economies, as fiscal health of GCC countries is very worrisome due to lower oil prices.

Budget deficit will continue to add pressure, as average break even oil price is plus $ 50, which means at current prices, oil producing GCC economies is spending cash from its own kitty, it has deepened the hole that may potentially see GCC region losing nearly USD 300 Billion in 2016.

Current economic condition strongly demands Revenue Contribution from non-oil sector, which is only be possible by selling of Land and Real Estates, by lifting good part of Subsidies and through Privatization.

The other possible strategic measures that can be taken are by sending back foreigners or expatriates working in the region and by reducing salaries. Presently on an average GDP growth in the M.E zone ranges between 2.5-4 pct is down from average 4.5 pct 2014.

However, there is a huge risk that despite fiscal consolidation, oil at current price level is not sustainable for the GCC economies. Whereas, in coming months there is real threat of another sharp drop in oil prices. Oil rigs have dropped to almost half from its peak, the flow of oil has slowed down, but the taps are still oozing oil because it cannot be shut down in one go and investors cannot take risk by holding funds and are pumping money.

Gulf Oil producing countries are faced with huge task after 9 pct or USD 127 Billion Fiscal Deficit in 2015 from USD 49 Billion surplus in 2014 is likely to widen in 2016 to USD 143 Billion on average oil price of $ 40 per barrel. In 1st quarter of current year oil has already averaged below $ 40. This also means breakeven price for oil to balance budget in GCC countries is around $ 80.

Fiscal adjustment looks extremely tough as impact of 5 pct VAT is likely to be introduced in 2018 may add mere 2 pct revenue, which only fills 20 pct of the gap.

 

Hence, Gulf economies will have to face with significant deficit that will require financing by using its Reserves or by Issuing Debt.

Ongoing oil related economic challenges and bleak outlook adds pressure on GCC currencies and interest rate. Due to size of the hole, holding of currency peg is once again in limelight. FED delay to hike its interest rates and US Dollar weakness may have provided breathing space.

Though economies of Bahrain and Oman is already faced with extraordinary unfavorable economic condition, but in reality pegging of currencies still suits remaining of the GCC economies because of smaller non-oil trading volumes and peg also help to contain inflation.

Saudi Arabia, Kuwait, Qatar and UAE have sufficient Reserves and Sovereign Wealth Fund Assets. GCC countries can even have secret understanding/pact to bail out two ailing economies to avoid bad spell in the region and can linger on for next 2- years in hope of oil recovery or else potentially two countries will be forced to surrender peg.

Whereas, due to large deficit size that has ballooned in short span of time, Devaluation may not be as effective, which is also inflationary, even 30-40 pct adjustment may not provided much needed relief on the fiscal side unless spending plan is drastically chopped or both are effectively combined.

GCC that has a net share of roughly 20 pct of the global oil production, in 2015 was deprived of nearly USD 441 Billion cash money due to fall in oil prices, if calculation is based on USD 65 price decline.

Depleting oil revenue and government withdrawal of funds is causing loss of deposit growth. This draining of liquidity is causing liquidity crunch that may add pressure on inter-bank money market rates. Luckily FED has taken a breather, but hike in USA will make life difficult for the Private sector as borrowings will become more expensive. Draining of liquidity will surely make Cost of Capital more expensive that will widen corporate spread.

Hence, watch debt market and bond rates of GCC for guidance. In coming months Credit Default Rate (CDS) will be another key indicator that should provide future market direction.

The only hope that could provide temporary respite and shore up oil prices would be another round of understanding, similar to the one initiated earlier by Russia to convince Iran and Saudi Arabia to narrow down their differences or if OPEC members decides to freeze or hold at an agreed production level Or else More Doom and Gloom for Oil Producing Nations.

After Saudi Arabia, Which country is next ?

https://asadcmka.wordpress.com/2015/12/29/after-saudi-arabia-which-country-is-next/

(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)

“Panama Paper” Open Question ?

Panama Papers could be icing on the cake for next financial and housing market disaster, as the cat is out of the bag, so more bad news on the issue is definitely coming, unless flow of information is intentionally ceased.

Estimated size of global laundering transaction is 2 pct of the Global GDP or nearly USD 1.5 Trillion.

Mind-Boggling Questions !

-Why should the we believe that Panama Paper disclosure is amazing facts or new revelation?

-Why is it necessary to set up an unannounced secret offshore company when the business is legitimate ?

-Why offshore transactions are considered secret deals when it is a legitimate business ?

-Offshore Financial Service (Another Country, not the one in which you Live) is a legal business and is considered a safe way to manage funds, as it legitimately saves its customers from being over taxed, then why do investors have to transfer money from backdoor and act secretly and hide their names and identity ?

-If the business is not unlawful then, why Law Firms are required to hide the identity and the name of final owner of the company is not disclosed ?

-If tax Evasion is permissible and transfer of money is not restricted, as sending money is considered legalized and moral business activity, then why transfer of money takes place secretly ?

-Do these legal firms and offshore Financial Centers obtain clearance/declaration from Tax authorities where they are resident about funds, assets, wealth or offshore property ?

-Is reporting of all such transaction to Tax Authority an obligation, as ignorance of law cannot be considered an excuse and how frequently such transaction are verified?

-Why such financial and legal operations are not managed with highest level of transparency ?

-Why Money Laundering Regulations are not properly applied to offshore Financial Centers ?

-How transactions worth in Billions of US Dollars, Euro, Pound and other Currencies being monitored to know the genuineness of such deals?

-How such large amounts are transferred without any check, though Financial action Task Force (FATF) regulates money laundering?

Conclusion

Will Panama Papers ever compel Governments and Parliaments to become more Transparent on Global Tax issues/Reforms ?

Or the World Leaders/Politicians/Legislators/Financial Authorities/Central Agencies/Regulators (CB’s & SEC’s)/Rating Agencies/Auditors (internal & External/Board of Governors/MOF are of the view that 99.5 pct of the remaining Global Population is stupid and naive and can always be-fooled and lured by the executors to protect the criminals, offenders, wrongdoers and sinners.

(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 Cuts PIB Coupon Rate by 100-150 bp                                

                      

Finally on Friday, SBP on MOF directive announced slash in PIB Coupon Rate by 175 basis point in 3-years to 7 pct, 150 basis point in 5-years to 7.75 pct and by 100 basis point in 10-years to 8.75 pct.

In my “Outlook  2016” I have projected coupon rate downward adjustment of around 150-250 basis point and PIB yield downside by 150-200 basis point.

https://asadcmka.wordpress.com/2015/12/22/pakistan-economic-outlook-2016/

https://www.linkedin.com/pulse/pakistan-economic-outlook-2016-asad-rizvi?trk=mp-author-card

To compute long term interest rate, the macroeconomic projection should be based on technical assumptions to determine the value of variable, which is long term interest rate that should also include 10-year PIB Yield.

Basically, long term interest rates are measured as a percentage based on averages of daily rates. The implication of interest rate pricing is not based on loans given to customers, the price or yield is determined through trading in inter-bank or financial market. The key is that lower long term interest rates mostly encourage new business openings that stimulate economic growth.

Coupon Rate is the Interest Rate expressed as percentage of Principal Amount or in other words it is Fixed Interest Income in terms of face value of asset from the time bond is issued.

Surprisingly the ballooning size and the amount of liquidity injection involved to encourage investment in Govt Paper is the miraculous, which is the major cause of Economic despair.

In theory Economy may be making big strides, but unless notable changes occur, current growth rate is simply Statistical Illusion because they are not real.

With current population growth rate that adds nearly 3.8 million annually, which other sectors have opened New Economic Avenues? Major corporate earners in Pakistan are banks due to opportunity provided by means of forceful liquidity injection encouraging to invest in government paper to arrest government borrowings and to contain deficit.

Automobiles Industry is minting money by fleecing consumer due to weak Japanese Yen over the years and stable Rupee and by demanding “Own Money”, as car prices are overvalued by 35 pct plus, as compared to few years ago.

Agriculturists are well aware that they will be blessed with support price and through various shapes of tax rebate incentive at the cost of nation, which will never be challenged at any forum.

Do we know anything about Steel Prices ? Price reached all time high of USD 1265 in June 2008 has touched the lows of USD 90 on March 31, 2016.

Despite 60 pct drop in Oil Prices, minor relief is given to Commuters. Cement industry, Fertilizers industry, Food and Sugar industry are enjoying low tariff, but no relief is offered to consumers.

Therefore, why should we believe on claims that big economic gains is appropriate when SBP Bank Lending Data depicts, constant decline in percentage terms against Banks Deposit growth, which is notch above 50 pct in ratio terms and hence is inversely proportional ?

If we do Mathematical analysis of Deposit growth of last few years the data will suggest good part of deposit growth is based on accrued interest on fixed income securities.

Further, to arrive at the acceptable growth level, take nominal and real numbers for calculation purpose, then based on Nominal Growth = Real Growth Rate plus Inflation, which is 2.63 pct (June – March). Deduct inflation number from the growth number to have real feel about the economic growth.

The whole point of discussion that I am trying to co-relate is that in Pakistan, Banks investments in GoP Securities are the “Economy Spoiler”. Out of total Rs 7.796 Trillion investment of the Outstanding Stock Basis – Face Value, Schedule Bank’s investments is Rs 6.227 Trillion or nearly 80 pct of the total investment. Whereas Total Schedule Bank’s Deposit is Rs 9.386 trillion against Schedule Bank’s Advances of mere Rs 4.831 Trillion.

Where are the Economic Pundits of Pakistan that only talk and boast of Donors nodding on meeting its target ?

Do they know the causes and cost of Debt (Domestic/Foreign) & Financing ?

Can Exporters guarantee increase in Exports Business in Size and Volume if Rupee is depreciated ?

Are they not aware of government savings and fiscal space due to Rate Cut & slash in Coupon ?

Are they not aware that the present dismal economic performance is due to Negligible Private sector Growth due to excessive investment by banks in GOP ?

Policy Makers have miserably failed to address/highlight the real cause of economic misery for which nation is paying a very high has cost.

I still believe that in Current Calendar Year (Dec-2016) there is substantial scope for further sharp Policy Rate Cut and downward adjustment of Coupon Rate, as both commodity prices will remain soft in coming months.

The key factor to stimulate growth would be combination of factors such as policy rate cut, coupon rate cut as Central Banks accommodative stance and fiscal space is the only way out to rescue and kick start Pakistan’s ailing economy.

It is imperative for the Policy makers to understand the seriousness and take initiative to work towards transmission of bulk of cuts that augur well for revival of Capex Cycle to upgrade physical assets such, as buildings/factories and machines that can be acquired through funding, which also means large Capital Expenditure.

The real problem is that large part of the population is struggling against a vicious circle of inverse relationship caused by excessive inequality and inter-generational mobility, as combination of inequality and low mobility is the influencing factor hurting the system. It needs to be clogged.

Monetary Policy is likely to be announced next week.

(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)