Dr. Kamal Monnoo |
Saudi Arabia agreed to give Pakistan $3 billion foreign currency support for a year and a loan of $3 billion in deferred payment for oil imports. Will this be sufficient to help the stock market stay up, and save the rupee from further devaluation? Does this help Pakistan negotiate better with IMF?
In my opinion, as far as the payment for oil is concerned, this is a short-term loan or a short-term deferral as we call it, which should last 12 months, meaning they are giving you time to pay back the loan after a year. So Pakistan has a $3 billion outright, which the Saudis are placing in our reserves, and they are also giving you a deferred payment for the purchase of oil for $3 billion.
Pakistan has a $3 billion outright, which the Saudis are placing in our reserves, and they are also giving you a deferred payment for the purchase of oil for $3 billion.
So in essence, we are talking about a total of $6 billion, unless the Saudis clearly specify that the first 3 payments, will be repayable after 3 whole years. For the stock market, we need to look into a lot of things; you have a facility of $6 billion from Saudi Arabia, but does that change the fundamentals of the stock market in anyway? And the answer is no. So then, why is it fluctuating? And the only plausible explanation is perception.
When we talk about perception in the stock market, we are basically looking at 3 different factors. (1) Do the investors see that the stocks in the current market are under-valued by any chance, making it a good entry point? (2) Do the investors foresee a higher return in the coming months/years, which would convince them to invest in the stock market instead of any place else.
(3) Then they have to ascertain whether entering the stock market now while the rupee is devaluating, is a good decision or not, should they invest elsewhere? Now to answer each of these separately; firstly, looking at whether the stock is currently undervalued, the answer would be possible yes and possibly no. If you look back at the start of the Nawaz Shareef era, the stock market index was much lower than now, which was not very far back, so for an investor, this may not be a good or a lower entry point.
Saudi Arabia agreed to give Pakistan $3 billion foreign currency support for a year and a loan of $3 billion in deferred payment for oil imports.
On the contrary, if we do not compare, this can be seen as a good point to enter the market. This also depends upon, whether the investor is a long-term investor or a short-term one. Secondly, thinking of a higher return if an investment is made now, the answer is clearly no. Because if you are expecting a further devaluation, that means your investment will also devalue.
A foreign investor will be looking to exit the market sometime, more plausible the rupee devaluation becomes, the more difficult it becomes for a foreign investor to decide a time to enter the market. Lastly, if not in stock exchange, where else should one invest. One may opt to just deposit money in the bank, and earn from increasing interests, as they are constantly climbing. You already have a discount rate of 8.5%, which is expected to further climb earlier next year.
This is always a safe bet, and usually why people opt for it. Another option is investing in properties, but as the property market is itself undergoing turmoil, people may want to pull out their money and invest in stocks instead. Analyzing all aspects together, one can’t be so sure of the future, unless of course, the new government comes up with the right kind of policies for the stock markets. Otherwise, I don’t believe the stock markets would go back to what they were even a year back.
About the IMF, it is very clear that the more options Pakistan has, the better they can negotiate with the IMF. By all accounts, the government needs about $12 billion to sustain the next 12 months. If the country already has 6 billion accounted for, and if China can lend us another 1 or 2 billion, so then, in essence, the bargain with the IMF should be easier. The challenge is to not agree upon terms with the IMF as collateral of fiscal indiscipline, and then impose certain things on the people and call it ‘forced action’.
Dr. Kamal Monnoo is Honorary Consul General of the Czech Republic and president English Speaking Union Lahore. He holds a Doctorate Degree from the ISM-St. Johns, Masters from Yale and Crummer and a Bachelors from Syracuse.