Moody’s decision to downgrade Pakistan’s sovereign credit ratings will affect trading in the stock market as foreign investors will further shy away from investing in equities, said Muhammad Ali, Chairman Securities and Exchange Commission of Pakistan (SECP) here on Tuesday.
To a question, Ali said the credit rating agency’s decision will further shatter confidence of foreign investors, who have already been moving cautiously for the last three months due to various reasons.
He was speaking to the media about recent developments taking place in the equity market.
“New foreign investor will not invest in the stock market, but being the regulator I cannot comment in which direction the Karachi Stock Exchange index, currently trading at 14,457 points, will move,” said a cautious Ali as his statement could have profound implications for the market.
The SECP chairman was the first high-ranking government functionary, who briefly spoke about implications of the ratings downgrade to junk status. Citing the reasons, Moody’s pointed to a worsening current account balance, declining foreign exchange reserves and looming payments to the International Monetary Fund, which may lead to default on international payments.
So far, finance ministry officials including the minister and secretary have kept mum over the issue. The government has already defaulted on payment of sovereign guarantees extended to the independent power producers.
On Monday, President Asif Ali Zardari told Japanese investors that despite Moody’s downgrade, the benchmark KSE-100 index was trading above 14,000 points, according to a handout issued by the presidency.
The Moody’s move may compound woes of the country, which is already facing difficulties in attracting foreign investment. Foreign investment plunged 63% in the last fiscal year, the fifth consecutive year of decline. It stood at only $741.5 million compared to roughly $2 billion a year ago. Portfolio investment remained negative at $71 million, according to the State Bank of Pakistan.
Muhammad Ali said average daily turnover at the bourse rose after January due to amendments in the capital gains tax law, but the trading volume has started coming down again because of various reasons. In 2011, average daily turnover was $39.1 million, which increased to $54.1 million later, he added.
Ali said the Federal Board of Revenue (FBR) will soon issue enabling rules for CGT, which will help the National Clearing Company of Pakistan to deduct the tax. Collection will be made from April 24, the day when the president promulgated the CGT Ordinance.
Speaking on the occasion, SECP’s Commissioner Securities Market Division Imtiaz Haider revealed that during a recent meeting with the KSE management, SECP turned down a proposal for allowing KSE blank sale of shares, an activity in which the broker sells shares without having possession.
He pointed out that blank sale was illegal across the globe, which cannot be permitted in Pakistan as well.
He, however, said SECP was considering allowing intra-day short selling, meaning brokers can sell some percentage of shares without having actual possession, but will square the deal before the end of day’s activity.
Published in The Express Tribune, July 18th, 2012.