UNDERSTANDING

1
UNDERSTANDING THE FINANCIAL PRESS Participants
BILAL ILAHI. PRIMA CORPORATE TRAINERS .


For Banks ICAP
2

BILAL ILAHI Educational Qualification 1977
Masters in Business Administration
.(U.S.A). 1973 B Com. Punjab University (Hailey
College). Work Experience 2006-Present CEO.
PRIMA CORPORATE TRAINERS. 1988-2006
Self-Employed. CEO, METROCON (Construction
Firm). 1991-2004 Self-Employed. CEO, Granada
Textile Mills (19, 000 spindles ). 1980-1988
Self-Employed. Owned and managed motels/hotels
in U.S.A. 1978-1980 Officer, BCCI.
3
Corporate Training Experience 2006-Present
Conducted Seminars and Workshops for Institute
of Chartered Accountants of Pakistan, MCB, Bank
of Punjab, UBL, Bank Alfalah, ABL and HBL.
Teaching Experience 2002- Present Taught MBA,
EMBA , BBA , classes at Beaconhouse Business
School / Curtin University Lahore and Imperial
College Lahore.
4
MACRO-ECONOMIC POLICY FISCAL POLICY
MONETARY POLICY.
5

• MACRO - ECONOMIC POLICY CONSISTS of MONETARY
  POLICY and FISCAL POLICY.
• The objective of MACRO - ECONOMIC policy is to
  have sustainable GDP GROWTH while containing
  INFLATION and achieving an acceptable rate of
  UNEMPLOYMENT.
• The fact that GDP rises or falls shows that
  BUSINESS CYCLES are unavoidable and
  MACRO-ECONOMIC policy can never really conquer
  them.

6
GDP GROWTH. Country's annual output and of good
and services. Same as economic growth. UNEMPLOYMEN
T. The number of people of working age without a
job as a percentage of the workforce. INFLATION.
Rising prices across the board. Monetarists (
Milton Friedman) believed it is a monetary
phenomena. To stabilize prices the rate of growth
of money supply needs to be carefully controlled.
7

• GDP UNEMPLOYMENT purchasing power INFLATION.
• PHILLIPS CURVE. There is a trade off between
  INFLATION and UNEMPLOYMENT.
• The lower the UNEMPLOYMENT RATE the higher is
  the INFLATION RATE. Governments have to choose
  between the two evils.
• Too much GDP growth will cause an increased rate
  of inflation called overheating in the economy.
  (e.g. concern in China today) which can lead to a
  recession and a hard landing.

8

• FISCAL POLICY
• One of 2 instruments of Macroeconomic policy.
• FISCAL POLICY comprises TAXATION and PUBLIC
  SPENDING.
• It is used to influence the level of DEMAND in
  the economy with the twin goals of getting
  UNEMPLOYMENT as low as possible without excessive
  INFLATION.
• Keynes preferred to manage DEMAND through fiscal
  policy.( Monetarists through money supply ie
  monetary policy)

9

• FISCAL POLICY is targeted on long - term goals.
  MONETARY POLICY is used for short-term
  adjustments.
• TAXATION may be a bad thing. Necessary to pay
  for public and social services. Also defense.
• HORIZONTAL EQUITY and VERTICAL EQUITY . To
  ensure fair taxation. Only then will people pay.

10

• LAFFER CURVE. Laffer argued that higher tax rate
  would increase revenue but at some point further
  increase in tax rates would cause revenue to
  fall. Basis of Supply side economics in USA UK
  in the 80s. Governments could raise more revenue
  by cutting tax rates.

11
TAXES IN PAKISTAN Income
Tax - Direct Tax.
FBR Customs Duty - Indirect
Tax. FBR G.S.T. -
Indirect Tax. FBR Federal Excise Date
- Indirect Tax. FBR Property Tax
- Direct Tax. Provincial
Motor vehicle Tax - Direct Tax.
( // ) Stamp Duty -
Direct Tax. ( // )
12

• PUBLIC SPENDING includes spending by federal,
  provincial, local governments and some government
  backed institutions (e.g.. WAPDA)
• Government should borrow only to invest and not
  to finance current PUBLIC SPENDING. (The golden
  rule)

13
BUDGET. An annual procedure to decide how much
PUBLIC SPENDING there should be in the year
ahead. And what mix of TAXATION and government
borrowing should finance it ? These are the
questions which the budget seeks to answer.
14

• Pakistans Fiscal Policy 07-08.
  
• Pakistan's Budget, 07-08
  Total Resources Rs.1.87
  tr. ( 30 bn.)
  CBR Receipts Rs.1.02 tr.
  Defense
  Rs. 275 bn.
  Development
  Rs.520 bn. PSDP infrastructure HRD.
  
  Budget deficit 4 of GDP. Rs.398 bn.
  Subsidies
  Rs.113 bn. For WAPDA , KESC, textiles,
  Utilities store.
  Transfer- Provinces 46
  Rs.491 bn.Fed div pool, grants. (does not
  include project aid and straight transfer to prov)

15

• CBRS Collection. In fiscal yr. 07-08 budgeted
  at Rs.1.02 tr. Tax collection showing rapid
  growth BUT as a of GDP not improving !!
  Tax to GDP ratio is 9.25 . In 1998-99 it
  was 11.
• Capital Gains of Rs 2 tr , in 2 yrs , in the
  Stock Mkt . Transactions in floated shares not
  taxed. CVT marginal.
• Agriculture Income ? ? ?

16

• Fruits of improved economy would not go to the
  common man if population growth of over 1.5
  Dr. Salman Shah , Advisor Finance.
• MDG Millennium Development Goals of UN. Cut
  global poverty in half by 2015. Focus on 8 points
  primary education, gender equality, child
  mortality, environment protection, fight AIDS
  etc. Pakistan has signed on this document.
• Social safety nets ie Zakat , Bait-ul-mal, EOBI,
  wheat subsidies etc add to 0.5 of GDP.
• Illiteracy poverty terrorists.

17

• MONETARY POLICY
• One of the two tools of MACRO-ECONOMIC POLICY and
  the side-kick of FISCAL POLICY.
• Objective of both FISCAL MONETARY POLICY is to
  have an economy with GDP growth, relatively full
  employment and stable prices. BUT in the absence
  of consistent FISCAL POLICY in many countries eg.
  USA the central bank ( THE FED ) has taken over
  the management of the business cycle.

18

• The function of a Central Bank is to control
  INFLATION and UNEPLOYMENT while managing
  sustainable GDP GROWTH.

19

• ECONOMIC SPEED LIMIT or POTENTIAL RATE OF GROWTH
  or TREND RATE OF GROWTH is the same. The pace at
  which the economy can grow without fuelling
  inflation ie. without getting overheated.
• For inflation to fall the economy has to grow
  below its TREND RATE OF (GDP) GROWTH.
• If TREND RATE is dropping the task of central
  bank becomes harder.
• Higher TREND RATE if there is productivity
  and/or labor supply. Eg. China adds 10 million
  workers a year.

20
FOREIGN EXCHANGE RESERVES IN ASIA. (July 2007)

• China 1,500. bn.
• Japan 913. bn.
• Taiwan 266. bn.
• South Korea 250. bn.
• India 213. bn.
• Singapore 144. bn.
• Hongkong 136. bn.
• Pakistan 16. bn.

21

• Monetary Policy is the process by which the
  Central Bank manages the money supply to achieve
  specific goals e.g. Controlling inflation
  ,maintaining an exchange rate achieving full
  employment GDP growth .
• Monetary Policy can involve
  1)Changing interest rates through OMO.
  2)Setting reserve requirements for banks.
  3)Trading in foreign exchange.
  
• 4)Setting discount rate.

22

• OMO tool of implementing monetary policy by
  which a Central Bank controls the national money
  supply by buying and selling govt. securities or
  other instruments.
• MONETARY TARGETS such as INTEREST RATES or
  EXCHANGE RATES are used to guide this
  implementation.
• EXPANSIONARY MONETARY POLICY increases the total
  supply of money in the economy by lowering
  interest rates to fight unemployment.

23

• INFLATION is controlled by managing liquidity
  through OMO (Open Market Operations).
• GDP Unemployment Inflation
  Interest Rates Inflation

24

• Central Banks
• U.S.A - THE FEDERAL RESERVE (THE FED)
• U.K. - THE BANK OF ENGLAND (B.O.E)
• E.U. - THE EUROPEAN CENTRAL BANK .
  
  .
  
  (ECB)
• JAPAN- THE BANK OF JAPAN (BOJ)
• INDIA - THE RESERVE BANK OF INDIA (R.B.I)
• PAKISTAN- THE STATE BANK OF PAKISTAN . .
  
  (SBP)

25

• FOREIGN EXCHANGE RESERVES.
• INFLOWS EXPORT PROCEEDS
  . REMITTANCES
  (INWARDS) .
  FDI
  .
  FPI
  .
  FOREIGN AID
  . FOREIGN BANK
  LOANS
• OUTFLOWS IMPORTS
  .
  REMITTANCES (OUTWARDS) .
  FDI
  .
  FPI
  .
  PAYMENTS ( Dividends , loans,)

26

• Reserve Currencies
• U.S
• EURO
• POUND STERLING
• YEN
• SWISS FRANC

27

• Typically a country needs enough foreign exchange
  reserves to cover 3 months imports or settle its
  short-term foreign debt.
• Proposals to spend money at home misunderstand
  the nature FOREX RESERVES. This would put
  downward pressure on the Rupee once is
  converted to Rupee for domestic spending. This
  would force the SBP to buy in the market thus
  returning the reserves to original position !!

28
----MARKETS---

• .

29
CURRENCIES Pak Rupee U S Euro Yuan (China)
Indian Rupee ( Inr )
30
Increased demand for a currency is due to
transaction demand for money.
OR speculative demand for money.
31

• Transaction demand for money is highly
  correlated to the country's level business
  activity ,GDP and employment level
• Speculative demand. An investor may choose to
  buy a currency if the return is high enough i.e
  .INTEREST RATE is high enough.
• Difficult for Central Bank to control.
  

32

• FOREIGN EXCHANGE MARKET. One of the largest in
  the world---- 2 trillion of currency changes
  hands every day.
• SPOT EXCHANGE RATE - Current Exchange Rate.
• FORWARD EXCHANGE RATE - Quoted and traded
  today but for delivery and payment on a specific
  future date.

33

• U.S.
• The IMF counts 13 countries using as their
  currency eg. Ecuador.
• 350 bn. are held outside of USA. Half of all
  notes in circulation.

34

• THE FED, The Federal Reserve, is the central
  bank of the USA.
• FOMC. The Federal Open Market Committee of the
  FED sets INTEREST RATES (The discount rate and
  The Federal Funds rate ).
• The FED carries out O.M.O. (open market
  operations) to control liquidity and inflation
  and set Interest Rates.
• Interest Rates affect the U.S. E.g. U.S. GDP
  Unemployment Inflation Interest Rates
  U.S..
  
• 
  

35

• 17.11.07
• Cut in interest rate of 75 basis points since
  Sept.
  
• The FED is trying to improve credit flows in
  view of the slump in US housing market.
  Sub-prime mortgage problem.
• Credit squeeze in inter-bank market because banks
  refuse to lend to each other not knowing which
  bank exposed to Sub-prime mortgages.(through
  mortgage backed securities CDOs)
• Further slowing the housing market GDP growth (
  08 estimate down 2 from2.75.) Vicious cycle.

36

• EURO
• Euro is the currency of the EURO ZONE (13
  countries) and not the entire E.U.(28 Countries).
• E.C.B. is the central Bank of the E.U.
• ECBs medium term inflation target is 2
  (Growth and stability pact of EU for the
  Eurozone).
• Euro gained 12 against US in 2007.
• Manufacturers considering moving production to
  -based zones. Eg.Airbus Industries.

37

• . Euro is , presently, appreciating because the
  EUROZONE economy is performing well. GDP growth
  brings with it inflation or risk of inflation
  therefore higher interest rates from ECB . This
  makes the Euro more attractive than the .
  Demand for Euro goes up hence its appreciation !
• Recent record strength of the Euro ( _at_ 1.48
  means ECB not expected to raise interest rate.
• Higher interest rates will curb both inflation
  and economic growth (put Eurozone exporters at a
  disadvantage). But also cause the Euro to rise
  further !!

38

• YUAN (China)
• 2.6 tr. Chinese economy. Only 5 of global GDP.
  But 1/3 of total increase in global GDP in 2006.
• Leaders now want to slow the economy. From 11.1
  in 2006 to 8 in 2007. From exports and
  fixed investment to consumer led economy.

39

• CHINESE YUAN UNDERVALUED.
• Record-breaking trade surpluses with the U.S.
  which should have caused the Yuan to appreciate.
• From 1994 to 2005 --------
  Fixed peg _at_ 8.28 Yuan / allowing
  the currency to fluctuate only in a narrow band.

40

• How was the FIXED PEG of 8.28Y/ employed
  successfully.??
• 1. EXPORTS GDP YUAN EXPORTS GDP
• 2. P.B.O.C (Chinas Central Bank) buys U.S
  ,sells Yuan.
• 3. YUAN (8.28Y/) EXPORTS
• 4. Above action releases too much liquidity
  (YUAN) in the economy.
• 5. MONEY SUPPLY INFLATION
• 6. P.B.O.C. does O.M.O to suck in excess
  liquidity .
• It sells Government Securities and buys Yuan.

41
INTEREST RATES MONEY SUPPLY INFLATION 8. High
Interest rates cause businesses to slow down. 9.
Exports GDP 10. Subsidies on interest rates by
the government for export industries. 11.
INTEREST RATES EXPORTS GDP .
--------- and the cycle continues ! !
!
42

• INDIAN RUPEE ( Inr. )
• Re.40.20 per US .
• External inflows on the rise FDI, FPI, overseas
  commercial bank loans etc. Pushed up the
  Re. and complicated monetary policy management by
  the RBI.
• Asian currency that has grown the most against
  in 2007.Indian exporters unhappy.

43

• RBIs monetary policy 07-08
  a.) Raised banks
  reserve requirements from 6.5 to 7.
  b.) Held
  interest rates steady so as not to attract
  further funds into the rupee. Good for exporters.
  
  c.) Tightened rules on foreign commercial
  bank borrowing. Firms borrowing 20 m. will have
  to use the proceeds abroad. d.) RBI
  intervenes by buying and injecting Rupees.
  This is inflationary.

44

• PAK RS.
• Pakistan's FOREX RESERVES affect the value of
  the Pak Rupee.
• Our RESERVES are approx 16 bn.
• Political, economic uncertainty can also affect
  the value of a currency.
• Interest Rates affect currency value.

45

• FPI also called hot money. FDI preferred over
  FPI.
• FDI is investment in fixed assets. Long-term.
• 
  

46

• SBPs Monetary Policy for 07-08.
• Assuming real GDP growth target of 7.2
  inflation target of 6.5 broad money supply
  growth should be 13.7 for 07-08.
• Monetary growth target for 07-08 is 13.7 . For
  the last 6years SBP has not met its target.
• Effective 1.8.07 SBP raised its key discount rate
  to 10 from 9.5.

47
Increased monetary tightening in 06-07 helped in
downward movement in inflation. Core inflation
ie. Non-food Non-energy measure of inflation
fell to 5.5 in 07. BUT food inflation rose to
17 in 07-08 because of supply issues and
headline inflation at 8 instead the targeted
6.5. Tight monetary stance helped reduce import
demand. However lower supply of credit to
important sectors of the economy would be
counter-productive.

48
1st half of 07-08 actual monetary expansion
19.2. because of govts bank borrowing . Feb
1st 2008 ,SBP raised the Discount Rate to 10.5
Cash Reserve Ratio to 8. SBP Governor
advises government
1.Hold auction of long term PIBs.
2.Generate more inflows in National
Savings.
3. Issuance of Sharia
compliant instruments. The risk to inflation
outweighs risk to growth.
49
Currencies are increasingly demonstrating a
strong correlation with other markets
particularly equities. E.g.. Yen-carry trade in
March 2007. Shanghai dropped 9 in Feb.2007.
50
COMMODITIES. CRUDE OIL COTTON GOLD COPPER WHEAT
PALM OIL
51
COMMODITY PRICING Contango. When commodity
prices are lower in the spot market and higher
in the futures market. Normally interest costs
means that futures prices are
higher. Backwardation. When commodity prices are
higher in the spot market and lower in the
futures market. Maybe because there is
currently a supply bottleneck.
52
CRUDE OIL
53

• The share of CRUDE OIL in Pakistans total
  imports is 23 .We import 82 of our needs. 11
  bn. expected in 07-08.
• Pakistans CRUDE OIL import is the prime cause
  of our TRADE DEFICIT.
• Increase in the price of oil (64 in 07)
  contributes to global inflation. Eg. Increased
  transportation cost and the higher prices of
  4,000 bye-products like plastics , polyester ,PET
  bottles, etc.

54
Some Related Definitions and Terms

• Fossil fuel Crude oil Natural Gas Coal
• Hydro carbons Release their energy when burned
  e.g. Crude Oil Natural Gas .
• Bio-fuels Ethanol Bio-diesel
• Alternative fuels Ethanol Bio-diesel
  tar sands
• Renewable Energy Hydro-electric Solar Wind
  Hydrogen fuel-cell.

55
Crude oil

• The most important component of energy equation
  is crude oil. It is a dark sticky liquid found
  trapped below the earth crust. Scientifically
  classified as hydro carbon
• Uses
• Refined into gasoline or petrol
• Refining by-products are LPG, kerosene etc.
• Non-fuel by-products are lubricants, asphalts etc
• End products are 4000 plus e.g. plastics,
  synthetic fibers, chemicals, fertilizers . etc.

56
Types of Oil

• There are 161 different internationally traded
  crude oils. They have different characteristics
  quality and market penetration.

57
Cont

• West Texas Intermediate (USA).
• API gravity 39.6 (light crude)
• Sulphur contents 0.24 (sweet)
• A very high quality oil. Excellent for refining,
  a larger portion of gasoline
• Brent (UK-North Sea)
• API gravity 38.3 degrees (light crude)
• Sulphur contents 0.37 (sweet)
• Less sweet than WTI ideal for making gasoline and
  middle distillates.

58
Measurement of Oil

• 1 Barrel 159 liters

59
RESERVES PRODUCTION CONSUMPTION
60
Reserves

• Total Endowment 2 trillion barrels
  approx.
• Drilled to date 850 billion barrels
• Reserves (proven) 950 billion barrels
• Located and found1,800 billion barrels

61
Consumption

• In 2005 the world consumed 84 million barrels per
  day. ( bpd)
• IEA energy policy advisor to G-8.
• IEA estimates for 2007 is 86 million bpd.
• USA consumes 25 of worlds production,60 of
  which is imported.
• The world consumes 2 barrels of crude oil for
  every barrel discovered.
• 40 of worlds supply comes from OPEC. Daily
  ceiling of 27 mn. bpd.

62
Price

• Internationally the price of oil is set in US
  dollars per barrel, by the forces of demand and
  supply.
• Oil is traded on international markets at a price
  set by the marginal barrel.
• In Jan 2007 the price of both New York light
  sweet and Brent were approximately 54 per
  barrel.
• The most important oil market is NYMEX (New York
  Mercantile Exchange).

63

• DEMAND FACTORS
• U.S. Demand.
• a.) Summer Driving Season
• b.) N.E. Winter Season.
• China.
• Expected to overtake Japan as the 2nd
  largest crude oil importer.
• 3. India.

64
Supply Factors

• Iran
• Iraq
• Nigeria
• Venezuela
• Choke points
• Hurricane season
• Tanker capacity
• Refinery capacity
• Strategic reserves of USA. Also Japan and
  India

65
Choke Points

• Given the fact that oil consumption occurs mainly
  in the industrialized west while oil production
  takes place largely in the middle east, former
  soviet union a significant volume of oil is
  traded internationally
• By pipe line 40 - transcontinental
• By tankers 60 - intercontinental
• (3500 tankers)

66
Strait of Hormuz

• It has two 1-mile-wide channels for marine
  traffic separated by a 2-mile-wide buffer zone.
• It is the only sea passage to the open ocean for
  large areas of the petroleum exporting Persian
  Gulf States.
• Some 40 percent of the world's oil supply passes
  through the strait.
• It is on this vital waterway then that the US
  receives 12 of its oil and Western Europe and
  Japan get 25 to 66 of their oil respectively.
• In addition 15 of the world's commerce is routed
  through Hormuz.

67
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68
Straits of Malacca

• The Strait of Malacca is a narrow, 805 km (500
  mile) stretch of water between Peninsular
  Malaysia and the Indonesian island of Sumatra.
• The Strait carries 50,000 vessels per year
• One-fourth of the world's sea trade ie 11
  million barrels a day
• At Phillips Channel near Singapore, the Strait
  narrows to 1.5 nautical miles (2.8 km).
• 80 of japan oil supplies passes from hare.

69
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70
Supply Factors

• Iran
• Iraq
• Nigeria
• Venezuela
• Choke points
• Hurricane season
• Tanker capacity
• Refinery capacity
• Strategic reserves of USA. Also Japan and
  India

71
Important Hurricanes

• U.S. Hurricane Season from 30th June
  to 30th November.
• Katrina in August 2005.
• Katrinas impact on U.S. gasoline markets,
  initially taking out 25 of U.S. crude oil
  production 15 of U.S. refinery capacity.

72
Important Hurricanes
73
Supply Factors

• Iran
• Iraq
• Nigeria
• Venezuela
• Choke points
• Hurricane season
• Tanker capacity
• Refinery capacity
• Strategic reserves of USA. Also Japan and
  India

74
In 2007 oil prices not determined so much by
supply- demand mismatch as by speculation.


75
COTTON

• 5 largest PRODUCERS
  China , USA , India , Pakistan
  , Uzbekistan.
• 5 largest EXPORTERS
  USA ,Fr Africa ,Uzbekistan ,Australia, India.
  
• Total international trade is 12 bn.
  
• Africas share doubled since 1980.
• Cotton is a thirsty crop .Water resources?
  Cotton relies on fertilizers insecticides.
• Worldwide mostly produced by Genetic Eng.

76

• Rate 1 maund (37/ 32 Kg) RS. 3,200.
  (Pakistan -KCE).
  1 bale
  of Cotton 4.05 maunds.
  1 Lot
  100 bales.

• 1 1b 0.65. (U.S.A New York Cotton
  Exch.)

77
Demand Factors
1.)Global consumption 98
million bales. Subject to global demand of
textiles. Eg. economy and purchasing power in the
EU, USA etc. 2.)Pakistans
demand 16 million bales based on 10 million
spindles. Supply Factors
1.) USA ,
Pakistan , India, China etc crop. Acreage and
Yield. Pakistans production 11.5 million bales.
Estimate of 07-08 import 3 mil. bales.

2.) Supply of man-made fibers eg polyester,
nylon, acrylic, etc. (substitutes)
78

• Normal cotton seed yeild 15-20mds per acre
  BT cotton seed yeild 60-100 mds
  //
• Govt. of Pakistan has not approved.
• GOP will have to import the seeds every year from
  MONSANTO because they lose their pest resistance
  qualities after one crop and spread virus which
  is difficult to control.
• Mealybug damage in 07-08 crop caused by
  uncertified BT cotton seeds.
• Experiment with blending to make it more
  economical.

79

• PALM OIL
• Rate 888 per ton. Or Ringitt 2,959 per ton.
  Up 53 in 2007.
• Demand Factors
• Global Demand for energy and food. Used for
  edible oil, sweetmeats , bio-diesel etc.
• Supply Factors
• 1.) Malaysia is a major producer.
  Requires lots of land.
  
  . 2.) Soya oil is a close substitute (
  Brazil). . 3.)
  Demand for Biomass for Bio-diesel.
  

80

• COPPER
• Rate 7,970 per ton.
• Market London Metal Exchange (LME)
• LME prices and trends provide the benchmark
  direction for metals future prices the world
  over.
• Demand Factors-
• 1.) China. 2.) India.
• Supply Factors-
  A supply shortage
  triggered the rally. No new investments in mining
  since last commodity boom.
• There is a demand supply mismatch

81
WHEAT

• Pakistan produced 22.5 million tons of wheat in
  06-07.
• Demand factors Not volatile . 21 mn. tons /
  yr.
• Supply factors a) Volatility created by
  weather . . b)
  Export and smuggling.

82

• 24.9.07
• In 6 months wheat up Rs.24/kg. from Rs.12.
• Export price Rs.13,000/ton in Mar-Apr. 07.
  TCP to float tender to cover lean
  period from Dec. 07 to Feb. 08.
  Landing cost
  Rs.27,000/ton. Import bill 400 mn.
• SBP advice to GOP in Dec 06. Build up
  strategic reserves(7 m. tons before exporting.)
  

83

• GOLD
• Rate 1 0z. 914( Jan08. International
  market.). Highest 850/oz on 21.1.80.
• 10 grams Rs 17,900. ( //
  Pakistan. 24-ct)
• Market London Bullion Market.
• Demand Factors-
• 1. Safe havenUS. or Gold.
  International political economic situation.
  Inverse relationship.
• 2. Lower interest rates, lower ,
  higher gold.
• 3. Hedge against oil-led inflation.
• 4. Indian wedding season.
• 5. Alternative form of money.
• Supply Factors-
• Stable in short run.

84

• THE RELATIONSHIP OF GOLD AND U.S.
• Central Banks, world wide, in 2000 owned ¼ of all
  the gold ever mined in their RESERVES. Now they
  started selling because it does not a.) have
  liquidity b.) earn interest c.) keep pace with
  inflation.
• GDP Purchasing Power UNEMPLOYMENT
  INFLATION INTEREST RATE US GOLD
• GDP Purchasing Power UNEMPLOYMENT
  INFLATION INTEREST RATE US GOLD

85
CAPITAL MARKETS
DOW JONES (DJIA) USA
NASDAQ
USA SP
USA FTSE
UK CAC
France DAX
Germany
NIKKEI
Japan KSE

Pakistan BSE
India
86

• CAPITAL MARKET includes institutions that
  channelize supply demand for long term capital
  e.g. Stock Exchange, Banks, Insurance cos.
• CAPITAL MARKET vs. MONEY MARKET
• STOCK EXCHANGE. A market in which shares are
  bought and sold. They facilitate saving and
  investment.
• Primary markets e.g. IPO,s Secondary markets.
  
• BOND MARKET. In Pakistan TFCs.
• KSE market cap.70 bn. Bombay 1 tr.

87
15
RISK-RETURN TRADE-OFF
RISK PREMIUM
SHARES / COMMON STOCK
RATE OF RETURN.
12
PREFERRED STOCK
TFC / CORPORATE BONDS
9
GOVERNMENT BONDS /SECURITIES
RISK-LESS RATE OF RETURN
RISK TO INVESTORS.
88
ANALYSING LISTED COs.

• Companies Products Services. History, future,
  competition.
  
• Management. Track Record.
• Board of Directors. Eg. Syed Babar Ali.
• Auditors. Top 4.
• Stock Price History.
• Financial Analysis.

89
EFFICIENT MARKET HYPOTHESIS All available
information is rapidly taken into account in
share prices. Eg. factored inor priced in
90

• KSE 100 index . May 98 - 800
• Jan 04 - 4800
• Mar 05 -10,300
• Apr 07
  -12,000
• Market Capitalization.
• Nov 2002. Rs.
  525 bn
• Sep 2003.
  Rs. 1 tr
• Feb. 2004
  Rs. 1.2 tr
• June.2005
  Rs. 2 tr.
  . Sept 2007
  Rs. 4.2 tr.

91

• Mutual Funds. Diversification. Low risk.
• Volume Leaders Eg. BOP, LUCKY CEMENT, HUBCO, MCB
• Technical action of the stock versus
  Fundamental action.
• SECP is the govt. watchdog. Protect investors.
  Trust is the cornerstone of the capital
  markets. Eg in USA , DJIA fell twice as much at
  the time of financial scandals of 2003 than it
  did on 9/11.
• 1.5 DISCOUNT RATE cut by SBP gave a boost to
  KSE 100 index in Nov 2002.

92
COMMODITIES MARKETS , CURRENCY MARKETS and
CAPITAL MARKETS and other markets are constantly
reacting within themselves AND with each other
e.g. 1.)Palm oil and Soya oil ,as substitutes. (
within commodities markets )

2.) Crude oil and palm oil
.When crude goes above 70,bio-diesel story
begins. ( within commodities markets)
3.) Yen-carry trade
.Yen , NZ , NZ stock mkt, Shanghai stock mkt.
(currencies markets and capital markets )
93
4.) Crude Oil and US. (commodities markets
currency markets)

5.) US and Gold. Inverse
relationship. Both safe havens. (currency markets
and commodity markets.)
94
MONEY MARKET

• MONEY MARKET is a financial market for short-
  term financial instruments( 1year) obligations
  called paper. Treasury bills, REPO agreements,
  Commercial paper Bankers acceptances are bought
  and sold by banks dealers.
• CAPITAL MARKET is for longer term funds
• INTERBANK MARKET is wholesale money market in
  which only banks / financial institutions can
  operate.Not a physical market.
• .

95

• LIBOR. London inter-bank offered rate.
  Daily (at 11.00 am) reference rate based on
  the interest rates at which banks offer to lend
  unsecured funds to other banks in the London
  wholesale money market. LIBOR is the basis for
  the worlds most liquid and active interest rate
  market.
• LIBID. London inter-bank bid rate. Lower than the
  LIBOR rate.
• LIBOR used as reference rate for a.) forward
  rates agreements b.) currencies. C.) variable
  rate mortgages.
• KIBOR. Karachi inter-bank rate.

96
INTERNATIONAL TRADE
W.T.O.
97
DEFINITIONS
EXPORTS. Sales abroad. IMPORTS. Purchase of
foreign goods and services. INTERNATIONAL
TRADE. Measured by the volume of imports
exports which has grown 17 times between 1950
2000 when output (GDP)increased only 6 times.
98
There are a few cases of rapid development in
modern history that have not relied on exports as
an engine of growth. ie. GDP growth.
99
(No Transcript)
100
TARIFF. Tax on goods produced abroad. E.g.
Custom duty by CBR. PROTECTIONISM. To protect a
countries economy from foreign competition.
Opposite of free trade . SUBSIDY. Money paid by
government to keep prices below what they would
be in a free market. A form of protectionism. QUOT
A. A limit on the number of goods that can be
imported . Also protectionism
101
NON-TARIFF BARRIERS. Eg. Pak cement export to
India. Opposed by WTO. DUMPING. Selling goods in
export market for less then the cost of producing
it. Opposed by WTO. ANTI-DUMPING DUTY. As per
WTO. Imposed by NTC in Pakistan FREE TRADE
AGREEMENT. Eg. between Pakistan and Sri Lanka.
FREE TRADE AREA.
E.g. ASEAN, EU. SAFTA. In initial stages.

102
(No Transcript)
103
LETS LOOK AT PAKISTANS EXPORTS! An important
component of our GDP the most important
contributor to our FOREX RESERVES. Pakistans
EXPORTS are expected to reach 18
bn. in 07-08. If Pakistan hopes to sustain 7
GDP growth rate we must have 14 growth rate in
exports.
104
PAKISTAN EXPORTS- COUNTRY WISE BREAK-UP.
Exports FY2006
Country

• U.S.A
• UAE
• UK
• Hong Kong
• Afghanistan
• Germany
• Italy
• China
• Spain
• France TOTAL

3.69bn 1.3bn 899m 719 831m 682m
521m 412m 379m 365m 9.80
bn.
105

• Exports heavily dependant on US EU.-where we
  export low-tech manufactures like textiles,
  surgical goods sports goods.
• India ( next door) is missing ?
• Exports to China negligible .China is a huge
  market for citrus fruits (0.5 bn.), rice and
  processed herbal medicines. Chinas Imports will
  grow.!!
• SAFTA in initial stages. Pakistan not part of any
  FREE TRADE AREA Eg. ASEAN, G.C.C.
• Lack of geographical diversification.

106

• PAKISTANS EXPORTS- PRODUCT WISE BREAK-UP.
• 1. Textiles. 62.00
  
• 2. Argo Products. 10.30
• 3. Leather 7.40
  
• 4. Chemical Pharma. 4.00
• 5. Sports Goods. 2.70
• 6. Carpets Rugs 2.50
• 7. Surgical Instruments. 1.60
• 8. Engineering goods 1.60
• 9. Other. 7.90
  
• TOTAL 100.00

107
WORLD BANKS CLASSIFICATION OF EXPORTS
WORLD GROWTH
CATEGORY.
PAKISTAN PRODUTS.

RATE
5
N.A
1)RESOURCE BASED 2) AGRICULTRE 3)LOW TECH
MANUFACTURES 4)MEDIUM TECH MANUFACTURES 5)HIGH
TECH MANUFACTURES
COPPER, etc. RAW COTTON, WHEAT,SUGAR,FRUITS. TEXTI
LES,CARPETS, SPORTS LEATHER, SURGICAL AUTOMOBILES,
AUTOPARTS PHARMA, CHEMICALS BIO-TECH, HI-TECH
SOFTWARE ELECTRONICS
12
N.A
77
10
3
20
3
20
108

• World Banks advice climb up the ladder from
  low-tech manufactures to medium and hi-tech, to
  increase its share of world trade.
• Auto-parts (medium-tech) Philippines 800 mn.
  India 600 mn. Pakistan 10 mn. in 2003.
• 67 Pak. Exports are textiles But only 2 of
  world textile exports. Competitive Advantage ?
• Textiles trade now called Rag trade. 5 global
  growth.
• Lack of product diversification.

109
COUNTRY PAKISTAN INDIA B,DESH THAILAND MALAYSIA S
INGAPORE JAPAN CHINA U.S.A HONGKONG
EXPORT In bn 18 112 11
123 158 283 590 974 1,024
611
110
Diversity of exports in S.E. Asia ( geographic
products ) where export growth is 20 .
THAILAND- cars (med-tech manufactures) and
rice (agricultural) .TO rich countries like Japan
USA and poor countries like Laos.
MALAYSIA- Palm oil and electronic
components. TO USA and India.

PHILIPINES-Computer chips and fruits .TO USA and
China.
111

• Government of Pakistans claims!
• GOP claims exports have more than doubled between
  1998-99 and 2005-06.
• From 7.8 bn to 16.5 bn. GOP also claims that
  GDP has doubled.
• This means exports as a of GDP were the same
  ie.12.9.
• After GDP rebased in 1999-2000. This means an
  improvement of 0.1 by this govt!
• GDP growth coming not from export growth but
  domestic consumption (cheap credit).

112

• High export growth requires high manufacturing
  growth.
• Large scale manufacturing sector declined from
  10.7 to 8.8 in 06-07.This reduced our
  exportable surplus !
• Consumption is going up at a higher rate as
  compared to GDP. This also reduces are exportable
  surplus.
• Savings should be higher for Investment to GDP
  ratio to improve. Need higher real interest
  rates.

113
Why has Pakistan lagged behind ? 1.)Exports was
never a central pillar of our development
strategy. 2.) Domestic markets after 1947 were
heavily protected. Exports were not as
profitable.
114
Future prospects of Pakistans exports.

• 2003-2005. 5 bn. investment in textiles in
  expansion and modernization .Positive effect
  showed in next 3 yrs. In 07 450mn!!
• After 30.6.08 under FTA with China, textile will
  enjoy special access not available to other
  countries eg. India, Bdesh, Vietnam.
• ISSUES. Infrastructure, human resource, govt
  policies, etc.

115
PAKISTANS IMPORTS

• CRUDE OIL (includes oil products)7.7bn.
• PALM OIL.

116
PAKISTANS TRADE DEFICIT CURRENT AC.
DEFICIT.

• Trade deficit 10 bn. (Trade imbalance)
• Current account deficit 7 bn.
• 06-07 Exports financed only 57 of our Imports.
  In 99-2000 it was 83.

117
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