KARACHI STOCK EXCHANGE

KARACHI STOCK EXCHANGE
ROLE OF CAPITAL MARKET IN ECONOMIC DEVELOPMENT
Presentation to the
ICMA Annual
Conference,
Lahore
by: Nadeem Naqvi
Managing Director
Karachi Stock Exchange
Dec 14, 2013
www.kse.com.pk
Why the Capital Market – Background (I)
 Bulk of commercial bank deposits are for less than one-year
 As a result, they can engage in only a limited amount of maturity
transformation, i.e. borrow short-term and lend long-term
 In era gone by, long-term financing for industry used to come from public
sector development finance institutions (DFI’s) such as NDFC, PICIC,
IDBP, Bankers Equity who received long term funding from multi-lateral
agencies and lent long term to industry
 Poor governance & losses led to closure of these DFI’s
 Despite their operating weakness these DFI’s did play an important role
in the industrial development of Pakistan from 1960’s to early 1980’s
KARACHI STOCK E XCHANGE 01
Why the Capital Market – Background (II)
 It was hoped that a new set of DFI’s could fill the void, so we had
government-to-government joint venture Investment Companies such as
Pak-Kuwait Investment Company, Saudi-Pak, Pak-Brunei, Pak-Iran, PakChina, Pak-Oman
 Unfortunately, with a few exceptions, the JV Investment Companies did
not fill the void of providing significant long term project finance
 Globally also, infrastructure and long-term finance has moved from
national DFI’s to capital markets in the last two decades
 In Pakistan, absence of a liquid private sector debt market has meant
that there are limited sources available for both the public & private
sectors to access long term capital needed for sustainable economic
growth
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Role of the Capital Market in Pakistan
 Despite the above noted limitations, Pakistan’s Capital Market has
played an important role in enabling the public and private sectors to
access long term funding
 In the last 10 years, the total amount of equity capital and debt raised
has been over PkR 630billion
 Out of this, over PkR 120billion was raised by the Government of
Pakistan via privatization through public offerings
 If the debt capital market is seriously developed there is no reason why
an enormous amount of savings (both domestic and international) can
not be tapped for infrastructure and industrial development by the
public and private sectors
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Capital Market & Economic Growth Linked
Development of Capital Market has been found to be closely
linked to the stage of economic development
CATEGORY
FRONTIER
ECONOMIES
TRANSITIONAL
ECONOMIES
PER CAPITA
GDP
Less than US$ 2000
US$ 2,000
to
US$ 8,000
EXAMPLES
(2011)
Financial Markets Development
• Nigeria - $1,500
• Increasing monetization of economy
• Vietnam - $1,400
• Growing demand for financial services & products
• Egypt - $2,780
• When GDP per capita reaches $2,000 30% of
population typically has bank accounts
• Indonesia - $3,500
• Colombia - $7,100
• Unofficial economy shrinks as SME’s need greater
financing from the formal sector
• Role of capital market grows
• S. Africa - $ 8,070
EMERGING
MIDDLE INCOME
ECONOMIES
US$ 8,000
to
US$ 20,000
• Malaysia - $ 9,980
• Pension Funds / Insurance Companies become
important institutional investors
• Mexico - $ 10,050
• Consumer credit gross
• Turkey - $ 10,520
• Businesses become larger needing greater amount
of long term funding from capital markets. Debt
market becomes increasingly important
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Mind MAP for Pakistan’s Industrialization
ENERGY
SELF-SUFFICIENCY &
IMPORT SUBSTITUTION
BASIC
INDUSTRIES
INFRASTRUCTURE
AGRICULTURE
AGRI
CONSUMER
PRODUCTS
TRADITIONAL
INDUSTRIES
RESTRUCTURING
COAL
OFFSHORE &
SHALE OIL &
GAS
COAL BASED
LIQUIDS
REFINERY
PETROCHEMICAL
COMPLEX
POWER
COPPER &
MINERALS
ALTERNATIVE
ENERGY
COPPER
COPPER
SMELTING
STEEL
STEEL
FABRICATION
ROADS
RAILWAY
PORTS
MAJOR CROPS
YIELD INCREASE
DAIRY CORPORTE
FARMING
FRUITS &
HORTICULTURES
FISHERIES
VALUE
ADDED
MILK VALUE
ADDED
HYGIENIC
VEGETABLE &
FRUIT PRODUCTS
MEAT & FISH
PRODUCTS
INDUSTRY
EXPORT
INCENTIVES
INSTRUMENTATION
REJUVINATING
SIALKOT
INDUSTRIES
CARPETS &
COTTAGE
INDUSTRY
EXPORTS
TEXTILES
INTEGRATED
MANUFACTURING
& ELECTRICAL
COMPONENTS
KARACHI STOCK E XCHANGE 05
Industrialization will need large long-term funding
How will critical infrastructure and industry creation by financed?
 Both domestic and global savings have to tapped for this
purpose
 Multilateral / supra national financial institutions will need to
play a major role in raising long term finance for infrastructure
& industrial projects
 The funding mechanism will have to be different from the past
 New mechanism will be centered around capital market as the
primary clearing house for supply & demand of long-term
capital
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How GoP can use Capital Market to raise funds
In the near-term, the existing equity capital market can provide GoP with immediate funding
POTENTIAL REALIZABLE VALUE TO GoP FROM SECONDARY OFFERINGS TO PUBLIC
Company
OGDC
PPL
HBL
UBL
NBP
Market
Cap
(PkRmn)
1,207,228
423,978
215,067
162,449
121,077
Govt.
Share
%
Current
Mkt Price
(PkR)
Premium
over Mkt
Price
75%
71%
42%
20%
76%
280.7
215.0
161.3
132.7
56.9
10%
10%
10%
10%
10%
Price with
Premium
(PkR)
308.8
236.5
177.4
146.0
62.6
Total (Based on price data of Dec 11, 2013)
Total cash generation of
PkR351bn or about:
.
Govt.
Stake
Offered
15%
15%
15%
15%
15%
# of
shares
(mn)
Total Sale
Value
(PkRmn)
645
296
200
184
319
199,193
69,956
35,486
26,804
19,977
1,644
351,416
US$mn
3,261
POTENTIAL CANDIDATES FOR INITIAL PUBLIC OFFERING OF 10% STAKE TO GENERAL PUBLIC
1 PARCO
2 Lahore Electricty Supply Company
3 Govt Holding (Pvt) Ltd.
4 State Life Insurance Corp.
5 Joint Venture Investment Comps.
(Saudi Pak, Pak Kuwait, Pak Brunei, Pak China, Pak Oman, Pak Libya and Pak Iran)
KARACHI STOCK E XCHANGE 07
How the numbers stack up
 The GoP generates US$4.0billion equivalent from sale of partial
stakes in public sector enterprises which is used as seed capital
for new infrastructure projects
 A further US$2.0billion can be generated through raising equity
for specific projects from the capital market
 Based on a 70:30 debt-equity ratio, US$14.0billion debt can be
generated implying potential available funding of US$20.0billion
(or PkR2.2trillion)
 This is substantial funding to kick start core development
projects in the medium term (within 2-5 years)
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Sources of long-term debt
There are several tried and tested sources of long-term debt:
 Infrastructure bonds with underlying assets as primary collateral
 Local currency global bonds with Supranational (eg. IFC) credit
rating
 Diaspora bonds with special incentives for overseas Pakistanis
 Provincial / Municipal revenue bonds with special tax exemptions
and steady cash flow stream
 Global infrastructure securities had market capitalization of
US$1.1trillion at the end of 2012
 It is estimated that demand for infrastructure funding in emerging
markets will be US$1.0trillion ANNUALLY until 2030 with Asia
accounting for 50%
KARACHI STOCK E XCHANGE 09
Capital Suppliers’ Perspective
 Infrastructure bonds are of particular interest to suppliers of long
term capital (global pension funds, insurance comps.) because:
1. Such bonds have / provide creation of long term underlying assets
essential to support economic growth
2. Infrastructure generally generates steady cash flows and above
average yields
3. Infrastructure projects have limited competition and usually high
barriers to entry
4. Although initially capital intensive, infrastructure assets have
modest operational expense and therefore have high operating
margins that support debt servicing
5. Presence of underlying assets means that possibility of Shariah
Compliance financing options are also available
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Imperative of Developing Debt Capital Market
 In view of the above noted potential, concerted effort is needed to
develop our Debt Capital Market
 In the first instance, secondary market trading of existing
Government debt (T-Bills, PIB’s) needs to be encouraged.
 KSE & CDC are working closely with SECP and SBP with strong
support from MoF to put in place the framework and mechanism for
KSE’s Bond Automated Trading System (BATS) to be used for
secondary market trading of Government securities with emphasis
on attracting domestic retail savers and also international
institutional debt investors
 Once familiarity of this mode is established, future infrastructure /
municipal bonds can also be traded on the BATS, providing liquidity
and depth to Debt Capital Market in Pakistan
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Beyond Infrastructure – Opportunities in Global Mega Trends - I
SECTOR
TREND OLD WORLD

DEMOGRAPHY
&
SOCIETY
Aging population
 Rising longevity
 Changing Ethnic Mix
 Deleveraging & Slow growth
Segment Opportunities
For
Pakistan





Nursing Provision
Ethnic Market Targeting
Health & Halal Food Products
Financial Planning
Outsourced Online Medical
Services
TREND NEW WORLD




Urbanization/Mega Cities
Education Sector
Health and Medical
Rural Uplift
Segment Opportunities





Inner city Renewal
Education Sector
Low Cost Housing
Health Clinics/ Pharmacies
Internet Health Care Advice
and Networking
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Beyond
while Infrastructure – Opportunities in Global Mega Trends - II
SECTOR
ENVIRONMENT,
ENERGY,
WATER
RESOURCES
SECTOR OLD WORLD





Recycling
Afforestation
Alternative Energy
Biotechnology
Electric Cars
Segment Opportunities
For
Pakistan





Land Reclamation
Solar / Wind Farms
Environment Clean up
Recyclable Materials
Agri -Technologies
SECTOR NEW WORLD





Solid Waste Management
Water Conservation
Desalination and Distribution
Alternative Energy
Mass Transit
Segment Opportunities





Solar Public lighting
Roof Top Solar Energy
Urban Waste Recycling
Disaster Mgmt. Services
Micro Hydro Power Plants
KARACHI STOCK E XCHANGE 13
Other End of the Spectrum : SME’s
 While the capital market can serve as funding source for large
long-term projects noted above, it also has a role to play for
private sector small and medium industries
 The stock exchanges and the SECP are finalizing the regulatory
framework for SME segment at the exchanges where companies
with paid-up capital of PkR 25million can list on the exchanges,
as against current minimum requirement of PkR 250million
 To safe-guard the interest of investors, initially only “ELIGIBLE
INVESTORS” would be allowed to invest in the SME segment
where, “Eligible Investors’ will be defined as entities with a
certain minimum liquid financial networth
KARACHI STOCK E XCHANGE 14
Equity Investors’ Perspective – Capital Market Performance
Bloomberg News, November 21, 2012
KSE 100 Index, the benchmark for Pakistan's equity
market, was the top gainer among
72 markets worldwide, when adjusted for
price swings in 2012, according to the
BLOOMBERG RISKLESS RETURN RANKING.
Over five years, Pakistan's risk- adjusted
returns ranked eighth in the world.
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Pakistan Market’s Sustained Outperformance
Nov12-Nov13 (YoY)
Jan-Nov 2013

MSCI EM
Singapore
MSCI EM
China
Thailand
Russia
Singapore
Hong Kong
Philippines
India
Malaysia
MSCI FM
Vietnam
Pakistan
-20%
Thailand
-1% -2% -2%
-4%
-10%
Russia
0%
India
0%
Hong Kong
7% 7% 7% 5%
10%
Philippines
19%
China
20%
Malaysia
23%
MSCI FM
30%
Vietnam
40%
50% 47%
45%
40%
34%
35%
30%
21%
25%
20%
13% 12%
15%
10% 8%
8%
10%
4% 4% 3%
5%
0%
0%
Pakistan
50% 44%
From Jan – Nov 2013, KSE-100 provided a return of 44% and on a twelve
month basis, it returned 47%
KARACHI STOCK E XCHANGE 16
Equity Investment: Consistently Superior Asset Class
*10-Year average annual return for asset classes
Ban k D epo sits
4%
Govt. T-B il ls
11%
Govt. PI Bs
12%
Defen ce Savi ng s C erts
12%
Gol d
KSE-100 In dex
17%
28%
*January 01, 2003 - December 31, 2012
KARACHI STOCK E XCHANGE 17
Our Collective Role as Finance Professionals
 As financial professionals (accountants, bankers, investment advisors and
managers, corporate finance specialists, venture capital & private equity
specialists, financial markets regulators) we have a special responsibility
of thinking out-of-the-box in structuring financial transactions beyond the
conventional banking boundaries
 We can play a crucial role in guiding our clients – both borrowers as well
as investors – in how to avail the opportunities in capital markets for
achieving most efficient financing and investment strategies where risks
are well understood and appropriately managed
 If we discharge our fiduciary duty in a responsible manner, we can
shorten the time-line of bringing the undocumented sector into the
official economy and play our part in actualizing the enormous economic
potential of Pakistan
KARACHI STOCK E XCHANGE 18
"If finance is the science of goal architecture, those
who work in the field are the architects who
structure these goals and manage the risks of small
businesses, families, school systems, cities,
corporations, and all the other vital institutions
throughout society. If finance is the stewardship of
society's assets, it is these same people who are
entrusted with the management and cultivation of
those assets".
Robert J. Shiller
2013 Nobel Prize in Economics
Professor of Economics at Yale University
THANK YOU
Serving Investors & Industry
Stock Exchange Building, Stock Exchange Road, Karachi-74000, Pakistan.
Tel: 111-001-122 Website: www.kse.com.pk