Articles of the year 2005

The Speculation Trap
Published on March 18th, 2005

An economist stated that the private sector borrowing has jumped by 325 Billion 6 months ago. This remarkable jump of 325 Billion in this short span of time has some very disquieting possibilities. We can safely say that the investment into Industry mainly balancing and modernization of textile machinery had been done before this period, to position the Textile manufacturers for the post WTO scenario. As there is no other apparent investment in Industry, it would appear that a significant portion of this sum has been put into the Stock Market and into the real Estate business. This would explain the constantly upward spiral of the share market and of the real Estate prices. There are a few points here that should be considered. The Direct Foreign Investment into the share market is minimal at best. Out of a total market capitalization of 40 Billion $ the DFI is only 90 million $ which is not even 0.25 %. This shows that the investments are all by locals and are backed by very heavy borrowings. These investments in real Estate in a highly speculative manner (Gwadar being a prime example) could have a very precarious downside. Real Estate holdings are notoriously difficult to liquidate, and the lending banks could be left holding a large number of properties with no buyers. On a downslide who will buy a residential lot in Gwadar, much like the Florida swamps which made many fortunes and lost many more.

Moin Fudda Managing Director of the Karachi Stock Exchange has stated on Indus TV that of a daily Turnover of 120 Billion Rs on the KSE 90% was on credit and only 10% Cash This shows a very high risk and an exposure that can have disastrous consequences.The unfortunate part is that the Policy managers failed to channel these funds into Industry, or Agriculture, for they were and still are being misled by the hype surrounding an Economy with a galloping share market breaking new records every week. These new highs are being quoted to all and sundry, followed by many congratulatory messages to each other.

The worst part is that these investments are non productive, in terms of actual manufacture or Grown produce ie Factory output or a quantum jump in any of our crops. These two areas are essential to any National Economy and should have been prioritized. For these are two areas which constitute 95% of the manpower and productivity of the Country, and are the backbone of any Nation.

The share Market euphoria is ephemeral and can vanish in an instant. Pakistan in its present situation stands at high risk. The fast breaking Baluch problem, coupled with the US threat to Iran does not bode well for speculators. The market itself is volatile, consisting of many faint-hearted souls, and saw last week just a computer glitch that dropped the Market by several hundred point after the Friday prayers. Even though the market recovered, it exposed the fragile nature of the players, who were seen hustling to cover their position on the Lahore Exchange!The Money managers of the Country must now ensure that the speculators do not continue on this dangerous path for their short term interests, for the consequences will be devastating to the market and to the Banking sector, which will find itself to be holding large amounts of high value paper but impossible to liquidate in a hurry. Another NAB like institution will have to be formed, but who will they catch? While the going is good everyone lines up for the Plaudits, its only When not if, the crunch does come you can bet the smart ones will have moved on, leaving the unfortunate many to pick up the pieces, and to rue the day.