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ISLAMABAD: Investors should forget India and instead profit from the ‘quiet rise’ of Pakistan along with Sri Lanka and Bangladesh, Barron’s Asia said.
“Forget India. Investors looking for the next big thing should look to its South Asia neighbours instead — Pakistan, Bangladesh and Sri Lanka,” America’s financial magazine in an article said.
According to the article, the three countries with a combined 390 million people represent what Morgan Stanley chief global strategist Ruchir Sharma calls “the quiet rise of South Asia” as opposed to India which has been “flattered by spasms of hype for years”.
While overshadowed by their larger neighbour, the trio is enjoying fast-paced growth, embracing much needed reforms, and look set to enjoy a demographic dividend over the long term. “A substantially higher economic growth rate than in many other economies globally, coupled with fantastic demographics that will continue supporting growth for many years ahead,” East Capital fund manager Adrian Pop tells Barron’s Asia.
The article mentions that Pakistan is the flag-bearer of the positive changes taking place in the South Asian nations. Since coming to power five years ago, Prime Minister Nawaz Sharif has got inflation under control, cut the budget deficit and reined in the current account deficit. But more importantly, terrorism finally appears to be on the backfoot given more assertive action by the army. Chinese investment has also poured in: $50 billion will be spent on new roads, transport links and energy projects.
“More power capacity is key for Pakistan to move to an even higher economic growth rate,” says Pop. That will benefit stocks in materials and energy.In December, the Pakistan Stock Exchange sold 40 percent of itself to a consortium of Chinese investors.
The Karachi stock index is up by about 50 percent since the start of last year, propelled by index compiler MSCI’s decision to bump up the country to emerging markets status. That will bring in hundreds of millions of dollars from passive funds into the Pakistani benchmark. The rally in stocks has arguably left the market looking a little pricey as the KSE 100 index trades at over 12 times earnings, its heftiest valuation since late 2009. That’s still about a 15 percent discount to the MSCI emerging markets index, however, plus Pakistani stocks yield an attractive 4 percent-plus dividend.
Bangladesh benefits from a growing working age population and rising labour costs elsewhere in Asia. Garment manufacturing for Western clothing companies has increasingly moved from China to places like Bangladesh, where wages are lower.
The article said in August it tipped downstream firm Pakistan State Oil (PSO.PK), which has since risen 10 percent. It’s worth hanging onto that stock, but we’d add upstream exploration player Oil & Gas Development (OGDC) to the mix too.
Shares in the Islamabad-based company have powered up 45 percent in the last year, and could rise by a further 30 percent.Oil & Gas Development will benefit from any further recovery in oil prices, which have roughly doubled since hitting their nadir last February.
Earnings per share should rise by 17 percent in full-year 2017 and 20 percent in full-year 2018. Oil & Gas Development trades at eight times forward earnings, which is toward the higher end of its historical valuation. That multiple is more compelling than exploration peer Pakistan Petroleum (PPL), however, which trades at 10 times next 12 months’ earnings.
About Lahore’s DG Khan Cement (DGKC), which is one of the country’s largest cement producers, with a capacity of more than four million tons a year. The stock also makes a good foundation for a Pakistan portfolio.
At the end of December, the countries jointly announced a $14 billion dam project close to DG Khan’s HQ in northern Pakistan. The dam will need about a million tons of cement.
Shares in the company have returned a solid 50 percent over the last year. DG Khan’s valuations looks a bit less stretched than that of rival Lucky Cement (LUCKY), which investors were told to pour into their portfolio over summer.
DG Khan trades at 10 times forward earnings, compared to Lucky’s 16 times. Its dividend yield of 2.6% is also bigger than its rival. Brokers think DG Khan can rise by as much as 25 percent.
Lowest market P/E in the region with the highest return.
Upgradation of Moody’s rating of the country.
Pakistan is the 26th largest economy according to PPP (Purchasing Power Parity), and the sixth largest populous country in the world with a burgeoning middle class, having 54% of the population below the age of 24 years. In news, Pakistan has been presented as the turbulent nation embroiled in militancy and political violence. However, the landscape of the country has been changing since the past two years, with an improving macroeconomic situation, steady political outlook and substantial improvement in law and order, and the upgradation of its bond ratings from Caa1 to B3, a stable outlook.
On 9th June 2015, the MSCI stated about a potential reclassification of the MSCI Pakistan Index into Emerging Markets from the current classification of Frontier Markets in its 2016 Annual Market Classification review. This categorization would trigger a large flow of emerging market funds to return to Pakistan as the MSCI Emerging Market Index is tracked by global funds worth $1.7 trillion, according to Bloomberg.
Further, in one of the lectures at the Aga Khan University, the Chief Investment Strategist of Morgan Stanley said that Pakistan’s rise is just a matter of time. This was due to the favorable demographics and the lower P/E of the stocks – performing better in terms of return – when compared to the markets of the developed world.
The KSE 100 Index, which tracks the top 100 companies out of the 557 listed on the stock exchange had a five-year US dollar CAGR of 25% (highest among its peers) and net profit margins 60% above the five-year average of the peer group whose margins are 10.2% lower than its five-year average. The Bourse has an average ROE of 19.2% against the peer average of 10.2%.
Pakistani stocks are cheaper when compared to their regional peers. Consider the following graph for further details:
As the above graph illustrates, Pakistani stocks have a lower P/E, P/B and higher dividend yield relative to its peers.
Swedish think-tank has pointed out that India is afraid of Pakistan’s economic stability through China-Pakistan Economic Corridor (CPEC).
According to the report titled “Silk Road Economic Belt considering security implications and the EU-China cooperation prospects”, India does not want China to perform as a mediator in the disputes, a private news channel reported.
“There is considerable concern within India that China, which has been neutral on Kashmir since 1963, can no longer be so now that its economic and security interests in these territories are growing in stake,” says a report by the Stockholm International Peace Research Institute (Sipri) – a Sweden-based think tank.
It further stated that China’s involvement after implementation of CPEC would possibly make it a stakeholder in Kashmir dispute as India does not want to internationalize this matter.
The report stated that India is depressed over the chances of employment in Pakistan after CPEC project.
Garden in Front of Punjab Assembly
Pakistan has the potential to be a global turnaround story. I recently spent time in-country listening to a wide range of perspectives and I am convinced that U.S. policymakers and business leaders need to look at Pakistan beyond the security lens. Getting our relationship right will require deeper thinking and action on issues around trade and investment, education, and broader economic development. The United States ought to be Pakistan’s preferred partner given its 70-year relationship. But in order to participate in the upside of the Pakistan story, the United States will need to view Pakistan not as a problem to be solved but as a potential partner. There are several changes that suggest the United States should soon act on this opportunity.
Pakistan Think Tank & its Members Thank Mr.Daniel Runde to See the Potential in the People & Nation of Pakistan
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The Pakistan of today is similar to that of Colombia in the late 1990s. Back then, words like “drugs, gangs, and failed state” were freely associated with the Andean country. Today, Colombia has a free trade agreement with the United States, a stable 3.5 percent annual GDP growth, and security is vastly improved. Similarly, Western headlines on Pakistan today gloss over the progress on the security front, the increased political stability, and incremental progress on the economic front. In spite of this potential for Pakistan, it continues to suffer from a terrible country brand that has not caught up with realities on the ground.
Action Against the Taliban
Pakistan’s improving security dynamic is the first change to note. It is hard to understate the before-and-after effects of the Taliban’s horrendous December 2014 attack on a military-owned elementary school in Peshawar that killed 145 people, including 132 schoolchildren aged eight to eighteen. Almost immediately after the attack, the military responded in force by taking out 157 terrorists via air strikes and ground operations in the North Waziristan and Khyber tribal areas adjacent to Peshawar.
What has not sunk into international perceptions about the country is the tangible consensus among government, military, and Pakistani citizens against violent terrorists including the Pakistani Taliban and the alphabet soup of other terrorist groups in and around the country. Pakistan will continue to experience attacks by fringe groups, but policymakers and investors need to stop operating as if the Pakistani Taliban is at Islamabad’s doorstep.
Prime Minister Nawaz Sharif is governing with a competent cabinet, a majority coalition, and is working in tandem with the military to deliver peace and security. Sharif was elected in Pakistan’s transition of power between democratically elected governments in April 2013 and so far, he has demonstrated enough of a commitment to democracy.
For much of last year, Sharif exercised restraint against an active opposition that led a crippling 162-day sit-in in front of the National Assembly to contest the 2013 election results. Instead of opting for an aggressive approach, Sharif wisely deferred to an independent election mission to verify the results, which recently ruled in favor of his party. The military, at the request of the Prime Minister, encouraged the crowds to disperse peacefully. The military’s decision not to use force against protesters – or the sitting prime minister – suggests that Pakistan could be on its way to further consolidating its fragile democracy.
Better Luck Around the Corridor
Chinese investment is another reason why the United States should reassess its Pakistan calculus. Since Xi Jinping first announced the $46 billion China-Pakistan Economic Corridor (CPEC) in 2014, the project has quickly become the centerpiece of diplomatic relations between the two countries. CPEC will include highways, railways, and oil and gas pipelines – all constructed via Chinese companies.
The CPEC project aims to connect China and Pakistan, ending in Pakistan’s Gwadar Port on the Arabian Sea.
The CPEC project aims to connect China and Pakistan, with an outlet to Pakistan’s Gwadar Port on the Arabian Sea.
Even the possibility of the scheme’s partial achievement has injected optimism in a country starved for infrastructure and energy investment. The deal has also greatly incentivized the government to clamp down on terrorist groups. Economic success is by no means guaranteed especially given China’s checkered track record of investing in infrastructure projects abroad. Still, China’s bet on Pakistan could overshadow US contributions unless we rethink our mix of engagement.
Similar to its approach in Kazakhstan, China is interested in leveraging Pakistan – in the words of Dan Twining – as a “launching pad” for greater connectivity with energy producers in the Gulf and Middle East, as well as markets in the West. The good news is that Pakistani businesses still prefer the allure of technology transfer and innovation offered by U.S. companies. But make no mistake: for Pakistanis, Chinese investment is better than no investment.
Pakistan: The Next Colombia Success Story?
Continued from page 1
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A New Development Story
Pakistan has a population of 182.1 million people and is the 6th largest country in the world. Sixty percent of the population is of working age. By 2050, Pakistan’s total population will be nearly 300 million, making it roughly ten times the size of Afghanistan. Pakistan is also among the world’s fastest urbanizing countries with half its people projected to live in cities by 2050. Twenty years ago, Islamabad, a planned city much like Brasilia, had a population of 400,000; today, it has a population of around 3 million including the peri-urban areas. Many Pakistani cities are undergoing a similar urbanization process, and this will create massive demands on food, energy, water, and consumer goods.
At the same time, macroeconomic and structural reforms over the last several governments have narrowed the budget deficit and raised GDP growth to a stable 4.5 percent despite large energy deficits, and built foreign reserves up to over $17 billion. Low oil prices and the $14 billion in annual remittances the country receives from its 6 million-strong diaspora have also helped. There has been substantial progress in reducing poverty, which has fallen to 13.6 percent in 2011 from 35 percent in 2002; in rural areas, poverty has dropped from 40 to 15 percent during the same period. While there is some debate on the accuracy of these numbers, there has been clear progress. In May, Standard and Poor upgraded Pakistan’s credit rating from stable to positive.
Pakistan is the world’s 26th largest economy in terms of purchasing power parity. Its national economic growth plan, Vision2025, aims much higher. With 90 percent of the country employed through SMEs, Pakistan has one of the most entrepreneurial economies in the world. Complete foreign equity is permitted in the infrastructure and manufacturing sectors, helping drive FDI to $1.45 billion in 2013, a 76 percent increase over the previous year but still far too small for such a big country.
Next Steps for International Engagement
As Pakistan gradually improves on a number of fronts, so should its relationship with the United States. Clearly, Pakistan wants more than just traditional foreign aid. During my visit, a prominent Pakistani intellectual and influencer told me that “if the United States isn’t going to build stuff, then it shouldn’t don’t bother.” Given the smaller budget envelope for U.S. infrastructure projects (the largest infrastructure project built by the United States in the last decade is the new U.S. embassy), assistance should be geared towards facilitating infrastructure investment particularly in the water and energy sectors.
Specifically, the United States should encourage regulatory and policy reform and encourage greater US investment using specialized agencies including Overseas Private Investment Corporation, the U.S. Trade Development Agency and USAID’s Development Credit Authority. Negotiations for a U.S.-Pakistan Bilateral Investment Treaty (BIT) have stalled due to reservations on both sides, but a successfully concluded BIT would be a strong signal of certainty and stability for US based investors interested in deeper engagement in Pakistan. This might be a good topic for discussion when Prime Minister Sharif visits DC in October.
A high level Pakistani official told me of their need for at least Pakistani 10,000 PhDs from the US in the near future. The United States should find more ways to increase educational opportunities for Pakistani students especially in critical areas such as urban planning, public administration, agriculture, and STEM.
Currently, the U.S. relationship with the country has been limited to a risk mitigation paradigm. However, the changes outlined above warrant a reframing of the way countries such as the United States engage with Pakistan’s government and especially its private sector. Pakistan is on a hopeful path and with the right mix of assistance and private investment, the United States can participate in Pakistan’s upside and remain a strategic partner.
This article previously stated that projections indicate Pakistan’s population will approach 300 million by 2025. It has been edited to indicate this will occur by 2050.
Pakistan: The Next Colombia Success Story?
Asif Haroon Raja
Establishment of China-Pakistan Economic Corridor (CPEC) was first proposed by Chinese Premier Li Keqiang during his visit to Pakistan in May 2013. Li stated, “Our two sides should focus on carrying out priority projects in connectivity, energy development and power generation”. At that time, Pak-China bilateral trade had reached $12 billion. The proposed project of linking Kashgar in northwest China with Gwadar Port on southwestern Arabian Sea coastline in Baluchistan was approved on July 5, 2013 during the visit of PM Nawaz Sharif to Beijing, which included construction of 200 km long tunnel. In December 2013, China committed $6.5 billion for the construction of a major nuclear power project in Karachi. In May 2014, another agreement was signed to start Orange Line metro train project in Lahore worth $1.27 billion. In November 2014, the two countries signed 19 agreements related to CPEC. In addition, Chinese firms started work on six mega power projects in Gilgit-Baltistan such as Dassu, Phandar, Bashu, Harpo, Yalbo to tackle Pakistan’s energy crisis.
Originally scheduled to come on September 14-16 last year, China’s President Xi Jinping’s visit was postponed in the wake of prolonged anti-government protests in Islamabad and security concerns, and the government not wanting anything untoward happening. Postponement of the visit was seen by the government as a big setback since it entailed investment of $26 billion in Pakistan. Onus of postponement was squarely put on the shoulders of those indulging in futile dharna politics. This setback was not an ordinary one when seen in the backdrop of worst ever energy crisis, economy in shambles, state corporations in decay and all economic indicators in negative – thanks to the inglorious five-year rule of PPP led coalition. Cash-strapped Pakistan struggling to finance energy projects from western donors couldn’t afford a single day delay.
Operation Zarb-e-Azb which started in mid June 2014 in North Waziristan after the brazen terror attack on Jinnah airport in Karachi and peace talks having fallen apart was put in top gear after the gruesome tragedy in Peshawar Army Public School on December 16, 2014. Its scope was spread all over the country and cooperation with Afghanistan was greatly improved. Rangers-Police intelligence based targeted operation in Karachi was also speeded up and so was Frontier Corps-Police operation in Baluchistan. These efforts were backed by National Security Policy, Counter Terrorism Policy, Joint Intelligence Directorate to coordinate efforts of 33 intelligence agencies, formation of Counter Terrorism Force at federal and provincial levels, lifting of moratorium on hanging of convicts, setting up of military courts and focussed 20-point National Action Plan, all in a bid to eliminate the scourge of terrorism.
Brilliant successes against terrorism and extremism, which raised the stature of Pak Army backed by air force very high among the international comity, helped in further enhancing the confidence of China’s leadership in Pakistan. Well aware of Indo-US encirclement plan and shifting of Ameica’s pivot to Asia-Pacific to contain China, the latter wanted an early opening into world market to become an unchallenged economic giant as well as the super power. Mindful of the under developemnt of its western province which is its soft belly and ongoing Uighur movement, China wants speedy modernisation of Xingjiang to bring it at par with eastern provinces. For the accomplishment of these dreams, China needs access to warm waters in Arabian Sea through Gwadar since this route is the shortest and the cheapest. This access was never granted to Russia. With this objective in view, President Xi Jinping undertook a visit to Islamabad and pleasantly surprised the Pakistanis by raising the level of investment from $ 26 billion to $ 45 Billion in Pakistan.
Pakistanis opened their hearts to welcome the worthy guest. During his two-day historic visit (April 20-21, 2015), President Xi signed 51 agreements/MoUs worth $28 billion, with $17 billion in pipeline spread over 15 years. His visit achieved the milestone of the groundbreaking of historic 3,000 km-long strategic China-Pakistan-Energy-Corridor (CPEC). It includes $ 18 billion worth energy projects such as coal, solar, hydroelectric power projects which will inject 10,400 MW electricity in the national grid by 2017/18, laying down fibre optic cable from Xingjiang to Rawalpindi, 1240 km long Karachi-Lahore motorway, metro and bus service in six major cities, up gradation of 1300 km long Karakorum Highway (first opened in 1978), oil/gas pipelines, commercial sea-lanes and host of other projects.
The CPEC project will include building new roads, a 1,800-km railway line and a network of oil pipelines to connect Kashgar in China’s western Xinjiang region to the seaport of Gwadar. It includes a string of energy projects, special economic zones, dry ports and other infrastructure. China is helping Pakistan in producing plutonium at Chinese built Khushab reactor and will also sell 8 submarines worth $5 billion, which will give a quantum jump to Pak Navy’s sea capability.
Gwadar, once a part of Oman before it was sold to Pakistan in 1958, is one of the least developed districts in Balochistan province. It sits strategically near the Persian Gulf and close to the Strait of Hormuz, through which 40 per cent of the world’s oil passes. Work on Gwadar deep-seaport had started in 2002 with China’s investment. In 2013, management of the seaport which was in the sloppy hands of Singapore PSA International was handed over to China’s Port Holdings. It is planned to develop Gwadar into free trade zone with a modern airport on the model of Singapore or Hong Kong and a gateway to CPEC. Some analysts perceive Gwadar port turning into China’s naval base in the Indian Ocean, enabling Beijing to monitor Indian and American naval activities and thus frustrating their ambition to convert the ocean into exclusive Indian lake. Modernization of Pak Navy by China is seen as a step in that direction.
Energy-poor Pakistan certainly seems to have found a saviour in China, which has promised to stand by the country in its dark hour (parts of the country suffer power cuts for up to 18 hours a day). Jubilant President Mamnoon Hussain predicted that the economic corridor will be a “monument of the century” benefitting “billions of people” in the region. Analysts believe that the CPEC has the potential to radically alter the regional dynamics of trade, development and politics. They say the projects conceived under CPEC will ease Pakistan’s energy shortages and make a substantial difference in the long term with both generation and transmission covered. Some experts opine this initiative can bring greater cohesion in South Asia, one of the world’s least economically integrated regions. Adil Najam, Dean of the Boston University Pardee School of Global Studies, believes anything that binds the region together is “a good idea” since countries tend to focus on “zero-sum geostrategic posturing” rather than recognising the benefits of integration. MNA Ahsan Iqbal says “CPEC is a game changer for the entire region and will uplift the lives of about 3 billion people across China, Central Asia, South Asia and the Middle East”.
While the CPEC may be ‘monumental’ for Pakistan, for China it is part of more ambitious plans to beef up the country’s global economic muscle. Chinese officials describe the corridor as the “flagship project” of a broader policy — “One Belt, One Road” — which seeks to physically connect China to its markets in Asia, Europe and beyond. This initiative includes the New Silk Road which will link China with Europe through Central Asia and the Maritime Silk Road to ensure a safe passage of China’s shipping through the Indian Ocean and the South China Sea. “China is not building the corridor as an act of charity for Pakistan. It will happily fund and build any structure that plays into this goal – whether we’re talking about roads or ports”, says Michael Kugelman, a senior associate at the Washington DC based Woodrow Wilson Centre. Access to Indian Ocean via Gwadar will enable China’s naval warships and merchant ships to bypass Malacca Strait.
At the same time, the new silk roads are bound to intensify ongoing competition between India and China –and to a lesser extent between China and the US – to invest in and cultivate influence in the broader Central Asian region. Kugelman stated, “India has long had its eyes on energy assets in Central Asia and Afghanistan, even as China has gobbled many of these up in recent years. The US has announced its own Silk Road initiative in the broader region”. India is concerned about China’s huge investment in Pakistan, particularly its recent decision to fund a new batch of nuclear reactors. Pakistan plans to add four new nuclear plants by 2023, funded by China, with four more reactors in the pipeline (adding up to a total power capacity of 7,930 MW by 2030). India and other detractors of Pakistan are propagating that China is supplying nuclear technology to Pakistan in defiance of the Nuclear Suppliers Group (NSG) guidelines, which forbid nuclear transfer to Pakistan as it has not signed the Nuclear Nonproliferation Treaty. China argues that these projects were agreed with Pakistan before it became a member of NSG in 2004.
Pakistan has remained under a dark star for a long period; it has bravely sailed past the period of trials and tribulations but at a very heavy cost. Pakistan has acted as the frontline state against the Soviets and against global terrorism and suffered enormously, but in the process it allowed China 35 free years to develop and prosper. Landmark CPEC has further cemented Pak-China relations and made them natural allies. China’s liberal investment which surpasses all foreign investments in Pakistan in the past are based on trust, confidence and convergence of interests and both are in a win-win cooperation. The all-weather, time-tested friends share common vision and seek peace and not confrontation. They have entered into a new era of geo-economic relationship and plan to boost two-way trade to $20 billion.
The Silk Road Economic Belt will not only connect and develop China and Pakistan but also the regional countries for the first time and promote peace. It has opened vista of great opportunities for Pakistan and will greatly help in poverty alleviation, overcome unemployment, remove inequities of smaller provinces and help Pakistan in becoming the next Asian tiger. Strategic economic moment for Pakistan has arrived and interesting part is that Pakistan has assumed the position of economic pivot for the whole region. This paradigm shift in circumstances is a cause of great worry for the enemies of Pakistan both within and outside. They have put their heads together to work out new strategies how to block the forward march, but time and tide is not in their favor.
The writer is a retired Brig/defence analyst/columnist/author of five books, Member Executive Council PESS, Director Measac Research Centre, Director Board of Governors TFP. email@example.com