Business | Markets
Removal of market floor poses new risks
Question is how far equity prices will fall.
- By Farhan Bokhari
- Published: 23:33 October 25, 2008
Islamabad: The opening of Pakistan's stock market tomorrow with the expected removal of a floor placed in late August to prevent the market from falling further raises a number of significant questions about the future of equity investments in the country.
The question is not so much that of the margin by which the Karachi stock exchange (KSE) will fall beginning tomorrow. The more relevant question is, how large will the hit be. It is likely that equity investors who felt unable to step out of the fray - even at a significant loss - will probably withdraw from the KSE with the removal of the restrictions.
Shaukat Tarin, the adviser to the prime minister on finance - a position which makes him the de facto finance minister - has said he opposes the idea of enforcing artificial locks of the kind introduced in the KSE, as such artificial measures were unlikely to provide stability.
"I am urging them [KSE's management] to remove the floor [curbs]. I am not in favour of this floor," he said last week. Tarin is right in making that point, as markets need to find their natural levels - up or down - depending on the interest or appetite of investors.
For Tarin, there are other vital considerations, too, just as he negotiates a new loan programme with international financial institutions, notably the International Monetary Fund (IMF). This is crucial to stave off a balance of payments crisis and raise between $3.5 billion (Dh12.85 billion) and $5 billion in the financial year ending June 2009.
Raising this amount will be central towards Pakistan's efforts for improving its own investment outlook that could then lay the basis for improving sentiment all around, including the stock market.
In a move which is meant to restore confidence among equity investors, Tarin has also announced the establishment of a Rs30 billion (Dh1.4 billion) fund mainly for Pakistani expatriates around the world to invest in Pakistani equities.
In spite of whatever the immediate trends in the stock market, removal of the curbs on trading is likely to be hailed by many foreign equity investors and independent experts.
However, there are bigger issues which need to be tackled. For weeks, Pakistani leaders and officials lived on the expectation of help from friendly foreign countries dubbed as "friends of Pakistan". But so far, there appears to be little success by way of help from bilateral donors.
Even close friends such as China and Saudi Arabia are widely believed to have privately assured Pakistan that they would not let it default on foreign payments, though they have also urged Islamabad to get its house in order. An IMF programme could set the basis for sharp reduction in government expenditure bringing in the necessary adjustments to monetary policy.
The writer is a journalist based in Pakistan.
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