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Pakistan downgraded to FM for size issues, not on market access requirements: PSX CEO

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September 09, 2021 (MLN): Pakistan has been downgraded to a Frontier Market (FM) from an Emerging Market (EM) due to size and liquidity issues, not because of regulatory and market access requirements for EMs, said Farrukh Khan, PSX CEO.

In an interview with Bloomberg, he said it is important to understand that Index provider MSCI Inc. emphasized that country meets the requirements for Market Accessibility under the classification framework for EMs.

The MSCI Pak FM would have a weight of 1.9% in MSCI Frontier Market Index and 4.98% in the MSCI Frontier Market 100 Index.

As per market expectations, this decision may turn out beneficial for the Pakistan capital market in terms of increasing visibility among foreign participants and will likely bring positive inflows of investments. To note, earlier MSCI Pakistan did well when it was in FM.

Commenting on it, Mr. Khan said, “We will see, how this plays out.”

Shedding light on the market’s performance, that is what fund managers are interested in, he said, “Back in 1991, the market opened for foreign investors. And over the long term, the Pakistan market in dollar terms has vastly outperformed.”

“While looking at the valuations right now, the price to earnings ratio of KSE- 100 index is around six times while the dividend yield is over 5%. And the discount to the MSCI frontier emerging markets, which used to average over the last 10 years in between 25% to 35%, is now up to 60%,” he added.

With regards to profitability growth of the companies, this year, the companies registered in the KSE-100 index, witnessed a robust growth of around 60% to 70%, compared to 2020 and 2019, he noted.

Addressing the macroeconomic indicators, Mr Khan said, “Pakistan’s economy has also been hit by the pandemic. But if you look at our comparative performance in the region, it has come out relatively better and quite strongly, and particularly our large scale manufacturing, and other industries have come out extremely strong with a record export number.”

In terms of the Initial Public Offering (IPO), PSX CEO mentioned that there have been a string of good IPOs that have come out in the last 12 months. “And yes, we do have a full pipeline,” he revealed.

PSX head said that in the last three weeks, there had been three IPOs. And there’s one that’s coming out, even just in the next few days, and it’s a tech-focused IPO.

When asked about other positives of the economy like a lot of money going into startups wherein some are the technology companies as well, he highlighted that due to money flowing into the Pakistani startup companies, they are taking a quantum leap.

“We’ve had over a quarter of a billion dollars that’s come in the last few months in startups in Pakistan which is more than the last two, three years combined. And we continue to see a very strong interest in this regard

PSX in response has recently launched a growth enterprise market (GEM) that helps startups to raise funds through listing on the capital market. It also allows exits to early-stage investors.

“And we are processing the first IPO right now,” he said.

During an interview, he was asked that despite firms do sound optimistic, how he can reverse the whole situation where foreign investors are not buying into that story because a billion dollars have already made an exit since 2017. Regardless of whether valuations are low or not, whether dividends are high/ attractive or not, they’re not coming in.

Replying to this, he said that the Securities and Exchange Commission of Pakistan (SECP) and PSX have continued to work in the reform process in Pakistan. “We are at the moment implementing a state of the art, trading and surveillance system that we bought from the Shenzhen stock exchange that will take our trading and surveillance capability into the 21st century. And, I believe we will continue to do our work.”

He said that valuations coupled with profitability growth are compelling in Pakistan.  The regulatory structure, the disclosure requirements, corporate governance are up to international standards.

What extremely encouraging is the significant domestic liquidity at PSX that has absorbed all foreign offloading. And last fiscal year, the market was up over 40% even in dollar terms because the rupee also appreciated, PSX head stated.

Continuing the talks on liquidity, he was asked how he sees the situation wherein IMF urging Pakistan to pull back stimulus at a time when Prime Minister Imran Khan is trying to ramp up growth. Responding to that, PSX CEO said, “I think it is a difficult situation.

The government has done extremely well in the last year and a half in tackling the economic fallout from the pandemic, and not just in terms of economic stimulus, but also in terms of the Social Security network that they have provided to the most vulnerable segments of the society. And that’s been lauded internationally, said PSX head.

“So it is a difficult act. I believe. The government is committed to continuing with the IMF programme. And it is my personal view, that there will be a meeting of minds between the government and the IMF of how to balance both withdrawing liquidity while at a time where the economy still needs stimulus,” he added.

In a response to the last query about how this Roshan Digital Pakistan program is going on, Mr Farrukh said that it has been a huge success for Pakistan overall as it has recorded over $2 billion foreign inflows in just 12 months that has really been a seminal event.

It allows just digital seamless ability for overseas Pakistanis anywhere in the world, to be able to open accounts, sitting at home or in their offices in Pakistan, and then be able to do a wide range of services,

However, the money flown in into the stock market has been relatively small out of that $2 billion-plus, that’s come into RDA from overseas Pakistanis.

“But, it’s for the first time in our financial sector that banks and brokers are sharing information, KYC, etc. so that it’s a seamless experience for the customers,“ he said. “And I think in the medium term that will lead to a significant inflow into the capital markets as well.”

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Posted on: 2021-09-09T19:58:58+05:00

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