Mr. Muhammad Farid Alam, CEO AKD Securities Ltd, has over two decades of capital market experience under his belt. Before AKD, Farid remained associated with the Pakistan Industrial Credit and Investment Corporation (PICIC), where he led the first buyout of state-owned mutual funds by the Privatization Commission. Earlier, he served as the Domestic Consultant for Asian Development Bank on Financial Sector Intermediation Loan (FSIL). Prior to that, he also served at Corporate & Industrial Restructuring Corporation (CIRC). Mr. Farid has always taken the lead in showcasing a positive narrative for the country’s capital markets, at home & abroad.
Farid Alam shared his thoughts with us last week before the IMF gave Pakistan the thumbs up on the first review.
GVS: Are you expecting a turnaround of the economy soon? How soon? What will be the first symptoms of this turnaround?
Farid Alam: Every crisis-hit economy first goes through the stabilization phase and then comes a recovery. Pakistan’s economy is no different. We are at a late stabilization phase – macro imbalances (i.e., twin deficits) are swiftly regressing, and capital markets are obliging to authorities’ reform efforts.
The authorities now need a transition from the stabilization to the recovery phase; the quicker they respond, the sooner we will see a turnaround. If you look at the past two weeks’ events, there has been a definite shift in policy direction with the authorities now being more accommodative.
There is a realization on the authorities’ part to implement the reform agenda gradually rather than in one go. In this regard, the implementation of axle load management and CNIC condition on Rs50,000 purchases have been deferred for a year and a quarter, respectively.
There is a proposal under consideration to incentivize builders and developers. It is aimed at reviving construction activity in the country. In a nutshell, the authorities are doing whatever they can in a limited fiscal and monetary space to revive the economy. We should start seeing positive results from early 2020.
GVS: What would you have done differently (or not) on the economic front in the past one year?
Farid Alam: The textbook policy prescription to address the economic challenges is pretty much the same. I think it’s the execution where the incumbent government could have done a better job. More specifically, the indecisiveness in the early few months had created an atmosphere of uncertainty, which badly hurt the market sentiment.
The same also sent a negative message and made the market participants believe that the economic managers are ill-prepared to handle the crisis. Markets hate uncertainty. Had the PTI’s economic managers been more precise in their strategic policy communication, the pain of the economic adjustments would have been a lot lesser.
GVS: To what extent does Pakistan’s stock market represent the economy’s real sentiment? Are these a barometer to understand ground dynamics across the country? You must have heard of the criticism that the government should worry about the real economy and not the stock market. How would you respond to that?
Farid Alam: One cannot move without the other. For instance, if the health and vigor of the ‘real’ economy are not appropriately managed, no stock market could possibly perform. This attachment to fundamentals is a core tenet of market performance. T
he government of Pakistan’s role in the stock market remains minor, where actual day-to-day trading is mostly carried out by individuals, private asset managers, and other financial institutions (pension funds, foreign investors).
Economies are cyclical by nature, and these fluctuations need to be dealt with favorable, long-term policies to extend the benefit of growth to the masses. Prudent policy-making and attention to austere practices coupled with developing competitive industries are the need of the hour.
Few markets in the commercial world are so perfectly matched, where buyers and sellers can observe the price of each stock & bid. Here flow of information is vital, with too many diverse data points at play for anyone actor, be it the government to drive sentiment on a sustainable basis.
In the long run, no market can sustain momentum without improvements in the ‘real’ economy, stabilization in trade, current account, large-scale-manufacturing index, bond market, and high-frequency consumption numbers – sales of petroleum product, cement, fertilizer, vehicles. Thus, core economic policy enhancements hold the key to core market performance.
GVS: The stock market earlier in September fell to its lows, seen for many years around 28,000. Since then, we have recovered to currently trading around 33,000, do you think we have seen the lows?
Farid Alam: Yes, I believe the worst is now over. The sentiment is now turning positive. It is also evident from movements in debt and FX markets. That said, consumer-disposable spending is yet to recover, where the devaluation, high-energy prices, and rising prices of consumer goods have considerably dented consumers’ sentiments.
Economies are cyclical by nature, and these fluctuations need to be dealt with favorable, long-term policies to extend the benefit of growth to the masses. Prudent policy-making and attention to austere practices coupled with developing competitive industries are the need of the hour and seeing all these elements play out in the current environment leave little room for pessimistic expectations.
GVS: What circumstances would make the market revisit those lows?
Farid Alam: Any external factors could knock markets out of balance. Events beyond our control, such as heightened trade tensions, higher oil prices, negative spillovers with regards to the situation in Afghanistan and Kashmir, could all raise risks impacting us at home.
Capital markets are essential to give capital to companies as an alternative to banks. Unfortunately, the Pakistani stock market (unlike its Indian counterparts) does not have much depth. Why that and what is needed to increase this depth? Pakistan’s capital markets indeed lack depth, with a shallow market penetration (0.1% of the total population versus 11.4% in Iran & 2.5% in India).
But what most people ignore is Pakistan’s large mutual fund industry – AUMs at US$3.5bn or 1.3% of GDP – as most retail investors prefer this route over conventional methods. It should increase going forward, given a clear focus of the government in documenting the economy and overhauling the regulatory aspects of the market to make it investor-friendly.
With regard to making markets investor-friendly, I would like to highlight that the currency in circulation against the total money supply stands at 30.1% in Pakistan. In contrast, in India, it stands at 13.3% – a simple measure to evaluate the use of formal channels for transactions. As a consequence of money kept out of the system, loosely documented assets, classes such as real estate and commodities become attractive.
Further, I would like to mention that the regulator (SECP, in our case) plays a critical role in developing the capital markets. Following the change in leadership at the SECP, we have seen a significant shift, with increased interaction between the regulator and the stakeholders. This is a meaningfully positive, and continued engagement is critical for developing a modern and efficient capital market.
GVS: How are the unusually high-interest rates by State Bank affecting stock markets and the economy in general? Are we expecting some relief soon?
Farid Alam: High-interest rates adversely impact equity markets. Firstly, the alternative asset classes (i.e., debt) become more attractive, and money flows from equity to debt instruments, for instance, mutual funds offloaded US$204m worth of equities in 2019.
Secondly, a tight monetary policy makes it harder for companies to do business. It increases the cost of doing business. Expansion plans are put on hold. On fiscal policy, I think the central bank should start easing by early 2020, as inflation will start coming down from March 2020 onwards.
GVS: What is the significance of the recent $444 million investments in Treasury Bills, being referred by media as “Hot Money”? Who are the key players?
Farid Alam: First, let me make it clear that the foreign investment irrespective of its form (i.e., equity or debt) is positive for the country, and we should encourage it more. It is the first time we have seen debt-related inflows on such a scale; total debt-related-net inflow stands at US$444m FYTD.
Numerous factors are at play and contributing towards this. Firstly, attractive returns on debt securities due to aggressive monetary tightening by the SBP versus easing by the regional central banks. Secondly, undervalued rupee following a sharp depreciation over the past year or so, and thirdly, an aggressive push from the authorities soliciting non-resident investors in the local debt market.
There are currently two contradictory narratives about its significance. The authorities believe it’s good to have more foreign participation, as it increases the depth of the debt market. The market, on the other hand, is skeptical about the fluid nature of the portfolio investment, where a sudden outflow could create a crisis by itself.
While both arguments have merits and demerits, I think overall, it is a positive development, particularly if Pakistan successfully attracts long-term capital. If you look at the movement in domestic debt (yields have significantly declined from their peak) and FX markets (rupee has gained some ground against the greenback), some of the improvements are attributable to the foreign inflows.
With regard to the market concern regarding the fluid nature of foreign investment in the domestic debt market, the government should use it prudently, which is to keep adequate reserve buffers to fund it when the money flows out.
GVS: Are you happy by the “Minimum Brokerage Charges”? Why has the government introduced these?
Farid Alam: “Minimum Brokerage Charges” is implemented to compensate for an increase in business costs, especially compliance-related costs in the backdrop of anti-money laundering laws and the need to invest in infrastructure to penetrate unexplored segments.
Further, this would result in competition on the quality of service, which should strengthen the market against undercutting competitors by charging lower or zero commission rates to gain business. As a result of such bad practices, not only disparity between service offerings widened, but also such brokers could not maintain the minimum level of the governance structure.
Hence, they lack the proficiency and technical infrastructure to comply with ever-increasing regulatory requirements. On the flip side, the implementation of the ‘Minimum Brokerage Fee’ regime has made it difficult for ‘small legacy brokers’ to do business.