Foreign Investors Waiting, Seeing; Budget Challenge
By NIRAJ SHETH
April 2, 2008; Page C5
NEW DELHI -- Pakistan's largely peaceful elections and swearing-in of a new prime minister have brought it some stability. But foreign capital -- which stopped coming in because of the nation's political turmoil -- is still sitting on the sidelines.
Investors say they are eager to start putting money back into the country, one of the few emerging markets performing well this year. (The Karachi 100 Stock Exchange 100 Index is up about 8% in 2008.)
However, they are waiting to see whether the new government will restart privatization moves halted last year and take other measures to repair an economy plagued by a budget shortfall, a staggering current-account deficit and inflation.
For years prior to 2007, foreign investment in Pakistan rose steadily. For the fiscal year that ended in June, the country received $5.2 billion in foreign direct investment and $1.8 billion in portfolio investment.
But that was a high-water mark, followed by a temporary state of emergency, riots and the killing of opposition leader Benazir Bhutto.
Investors turned sour; in the eight months that ended in February, foreign investment was just two-thirds what it was in the same period one year earlier.
At Pakistan's stock market, the numbers look surprisingly good. Even with the turbulence of 2007's last months, the Karachi 100 index was still up 40% for the year. And its performance so far in 2008 compares favorably not just with Western markets, but with the Bombay Stock Exchange's Sensex index, which has dropped 23%.
Still, the Pakistani market's performance hasn't been enough to tempt people to invest further. "We're not ready yet to put in a lot more," says Slim Feriani of Progressive Asset Management, a London-based emerging markets fund that has invested $3.2 million in Pakistan. "We just want to let the dust settle a bit."
This is despite the peaceful transition of power that appears to be under way after nine years of President Pervez Musharraf's military-backed rule. In February's democratic parliamentary elections, which Mr. Musharraf ushered in, his supporters were roundly defeated. The new government has been formed by two opposition parties, including
Ms. Bhutto's Pakistan People's Party.
Investors and analysts point to a few areas where the new government needs to prove itself before the foreign capital comes back. One is the stalled process of privatizing the banking sector. Many credit the sale of shares in United Bank in 2002 as the trigger for five years of strong capital inflows. But the past eight months have seen little activity in a sector heavily favored by foreign investors keen on trying to tap Pakistan's growing consumer base.
The new government's first test is coming up. Last year, Pakistan announced plans to sell stakes in the National Bank of Pakistan and Habib Bank through global depositary receipts, or GDRs, on the London Stock Exchange. As political storm clouds gathered, the sales -- expected to be for a 23% stake in NBP and a 7.5% stake in Habib Bank -
- didn't materialize.
"What everyone is hoping is that the government will resume the GDR process," says Salman Ali, head of research in Pakistan for Citigroup. "It has very little choice if it wants to send the signal that it's business as usual."
Investors say they would also like to see more privatization in the oil sector, which also draws a large share of foreign capital. But unlike in banking, the Musharraf-led government made no promises to open up oil exploration to further private investment.
A bigger, potentially thornier task for policy makers still lies ahead. Pakistan is facing a large budget shortfall and a current-account deficit equivalent to 5.3% of its gross domestic product.
Skyrocketing oil costs threaten to lead to energy shortages for much of the country. And climbing food prices could raise inflation to as high as 9%, the central bank said last week. In February, inflation was 8.4% on an annual basis.
Investors are asking if the new government, formed by parties that have promoted populist policies, can take the measures needed to avert an economic crisis. "Let's not skirt around the issue that these guys have been in power in the past and they've had a pretty bad track record in governance and also dealing with foreign investors," says Sakib Sherani, an economist with ABN Amro Bank in Pakistan.
In spite of the economic woes, some observers expect the Karachi market to gain 20% to 25% in 2008, in line with growth in corporate earnings. The expectations are based on the idea that some sectors of the economy, such as real estate, are undervalued, and on the continuing attractive valuation of Pakistani stocks. By some estimates, stocks in Pakistan have a historic average price-earnings ratio of 11.
The prospect of a significant U.S. recession, which worries investors in most countries, doesn't seem to be on many radar screens in Pakistan. Unlike India, Pakistan isn't a large trade partner of the U.S. "It goes in our favor that because of our low level of exports,
we are insulated from global developments, " says Khurram Shehzad, who manages a $500 million equities fund at Karachi-based National Fullerton Asset Management.
The uncertain fate of Mr. Musharraf also doesn't seem to bother investors. While he was elected in November for another five-year term, officials in the new government have vowed to remove him from power. Most investors say Mr. Musharraf's defeat in the February polls, and his reduced standing with parliamentary democracy restored, make him a less important factor in Pakistan's future. "He's no longer as relevant," Mr. Sherani says.
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