What you don’t know, you won’t put your money in

Farooq Tirmizi April 17, 2010

KARACHI: One can try very hard to search for bright spots in the monthly report on foreign investment in Pakistan, issued by the State Bank on Friday, but there were very few to be found.

It is an all-round appalling statement on just how few non-residents of the country are willing to put their money in Pakistan. Perhaps the single most significant positive point that one could point to was the fact that private portfolio investments – which means the amount that foreigners invest in Pakistan’s stock market – had gone from a net outflow of $418 million to a net inflow of $456 million.

This is significant since it tells us that while foreign investors are shying away from hard investments in Pakistan that take years to realize returns from, they are not quite willing to walk away from the country either and want at least some exposure to Pakistani economic growth in their portfolios.

This is not entirely surprising since the country does offer quite a lot of attractions. It is one of the largest countries in the world by population and the 27th largest economy in the world in purchasing power parity terms.

For two years in a row, Pakistan has been ranked as the best place to do business in South Asia in the World Bank’s Doing Business Report, one of the most widely used publications on the subject of investment-friendliness of nations.

So the easiest way to try and profit from this economy and its growth would be to invest in stocks. It is relatively quick and easy to get out of if one runs into trouble.

But the country also offers several downside risks, some of which may surprise most people. For starters, while security is a big turn-off for most foreigners, they are not entirely unwilling to invest in unsafe places. Mexico City and Sao Paolo are amongst some of the most dangerous cities in the world in terms of their crime levels yet investment into both Mexico and Brazil keeps rising. So what accounts for the difference?

Several factors are at play, but one of the biggest one is information. The only thing that people outside the country know about Pakistan is conflict. Any serious investors looking to put money into Pakistan wants to know what the potential for profit is as well as the risk of loss. He or she will get relatively very little of that information, particularly industry specific information from online sources, whether they are free or paid services.

Investors are willing to take risks if they know what they are getting into.

Case in point: the three industries in which investors put most of their money, according to the State Bank’s report, are oil & gas, telecommunications and power, accounting for 30%, 16% and 9% respectively of the total foreign investment inflows into the country.

It is no coincidence that these three industries also have the most comprehensive data for Pakistan available online, much of it for free. If other industries regularly put out more complete information online, one could expect to see a similar surge of investment in those sectors as well.