The economies of the world have been hit hard by the coronavirus. We have been no exception
Like most global financial markets, the Pakistan Stock Exchange is in hot waters ever since the outbreak of coronavirus in January. There has been a steady decline in the performance of the PSE since January and February. Currently it looks like a free fall.
The benchmark KSE-100 index has declined by over 10,000 points from a level of 40,735 points to below the psychological barrier of 30,000 points. Over Rs 2 trillion from the market capitalisation have eroded in just 80 days. Foreign investors have sold stocks of over $100 million.
In the last nine trading sessions, trading was halted six times to provide breather to panicking investors. “The situation is very tricky and uncertain in the market. No one knows what will happen tomorrow,” says Samiullah Tariq, the director for research at Arif Habib Investments. He says till early March there was pressure from selling by foreign investors, however, now with the outbreak of corona epidemic in Pakistan, especially in Sindh, the local investors too have panicked and lost confidence in the market.
They have thus offloaded their stocks in the market at discounted prices. “Our financial and economic capital is wearing a deserted look. All the economic activities have been halted,” says Samiullah. Concern for safety has now taken over everything else; no one is thinking about investments or losses, he adds.
Since the outbreak of Corona virus the oil sector has been hit by a major blow. From 70 dollars per barrel the oil prices have reached an 18-year low level of 24 dollars per barrel. Even further decline is considered likely. After a sharp decline in oil demand in China, consumption of oil is likely to take a major dip in Europe as well, which has become the epicenter of Corona virus after China.
In KSE-100 index the weightage of oil sector is around 20 percent. Because of the decline in international oil prices all the oil and gas exploration and marketing companies received a battering in the last three months. However, now since the economic activities in the country also has come to a standstill there is panic selling in all the stocks.
“The halt in construction activities has hit the cement and steel manufacturing companies as well,” says Samiullah. Demand for consumer items has declined sharply and it is taking its toll on the market.
Investment banker Husnain Asghar Ali points out that in the US, European and Asian stock markets, their central banks and respective governments are helping them overcome this crisis, whereas in Pakistan neither the government nor the central bank have acknowledged the gravity of the situation. “The market was expecting a reduction of at least 150 to 200 basis points, however, a reduction of 75 basis points in the policy rate depressed the market further and there is no hope in sight,” he laments.
In the past, whenever a crisis situation arose the government directed state-owned institutions like the NIT, State Life, the EOBI and provincial pension funds to buy stocks for the restoration of investor confidence, says Husnain. However, in the current crisis, hardly any intervention from the government or central bank can be seen to boost the confidence of the investors, he adds.
In this free fall, small investors are the major casualty. A dejected small investor, Ali Ahmed, says his investment in the stock market was valued at around Rs 3.5 million three months ago. It has now been reduced to Rs 2 million. “Like many small investors my bread and butter comes from the stock market, but in the present situation I can’t bear further losses,” he says. The government-owned and private mutual funds as well as big brokers are not helping out,” Ahmed adds.
The situation in the forex market is also quite uncertain. The dollar has gained by Rs 5 to reach at Rs 158 per dollar. According to Malik Bostan, the president of Forex Association of Pakistan, foreign investors who parked their investment in the Treasury bills are now withdrawing it at a very fast pace. In treasury bills, the foreign investment which is also known as hot money, was over $3 billion till the first of week of March. However, it has now come down to $2 billion, he says.
The situation in the forex market is also quite uncertain. The dollar has gained by Rs 5 to reach at Rs 158 per dollar. According to Malik Bostan, the president of Forex Association of Pakistan, foreign investors who parked their investment in the Treasury bills are now withdrawing it at a very fast pace.
On a daily basis, foreign investors are withdrawing about $100 million of hot money from the interbank market. “Because of global lock-down and restrictions on travelling there’re hardly any buyers for dollars or other foreign currencies in the open market, whatever foreign currency we purchase we’re selling it in the interbank market,” he adds.
Commenting on the post-corona virus situation, economist Ali Khizar defends the decision of the State Bank to make only a nominal reduction in the interest rate. “The central banks of the US and European countries cut their policy interest rate substantially but still these measures couldn’t stop the steep decline in their markets; even bailout packages can’t restore investors’ confidence,” he observes.
After China, the US and European countries have also been locked down for the outside world because of the Corona epidemic. As a result, he adds, the exports and remittances will take a major hit in the coming months. The central bank foresees this situation and has avoided any drastic cut in its policy rate. However, he says, the sharp decline in the oil prices and reduction in the import of other goods will mitigate the decline which the country is likely to face in exports and remittances.
The outflow of hot money from the treasury-bills, he believes, will subside in a few days because the rate of return on them is still very attractive. Even if the outflow of hot money continues the foreign exchange reserves of the central bank are around $12.8 billion, which is enough to bear this shock, he adds.
Apart from the financial assistance of $350 million by the Asian Development Bank, the $238 million by the World Bank to help fight the Corona virus will help in maintaining the forex reserves at a comfortable level. “The State Bank can easily keep the rupee-dollar in the range Rs155-160 in the coming two to three months without any difficulty” he observes.
Ali says since the Corona virus has shaken all the developed economies, the GDP growth is likely to remain in the range of 2 to 2.5 percent compared to the early projection of 3.5 percent. Since all the economies of the world have been hit by Corona virus, we’re no exception,” he says.