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Pakistan
Could Become Cash Magnet
If New Government Passes Some Tests
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.
![[Graphic]](cid:image010.gif@01C894D2.DD000C30) 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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