ECONOMIC UPDATE: TRADE IMBALANCE WIDENS AND KSE LOSES USD

UNCLAS SECTION 01 OF 02 ISLAMABAD 003156

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EAID PREL PK
SUBJECT: ECONOMIC UPDATE: TRADE IMBALANCE WIDENS AND KSE LOSES USD
14 MILLION IN FOREIGN INVESTMENT IN SEPTEMBER


1. (SBU) Summary. The Karachi shares market displayed lackluster
performance during the week ending on September 26th as trading
volumes reached a 10-year low of 2.477 million shares. During the
month of September, foreign investors withdrew USD 14.33 million
from the Karachi Stock Exchange (KSE). Analysts cite investors'
cautious stance over the prevailing political situation and
deteriorating economic indicators as the impetus. Meanwhile,
Moody's downgraded Pakistan's B2 bond ratings and B3 foreign
currency bank deposit ceiling. Textile imports have dropped 4.2
percent year on year in July-August 2008 while overall imports
increased 31.7 percent. End Summary.

KSE DROPS 51 PERCENT
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2. (U) During the week ending on September 26th, foreign investors
offloaded shares and withdrew USD 4.72 million. The benchmark
KSE-100 index closed at 9,184.15 points, down by 16.45 points. The
overall market capitalization declined by PKR 19 billion to PKR
2.848 trillion. The KSE-100 index declined by 0.18 percent week on
week moving closer to the index floor of 9,144 points during the
week ending on September 26th. Volumes plunged by 51 percent week on
week posting the lowest market volume in a decade. During the month
of September, foreign investors took out USD 14.33 million from the
Karachi stock exchange. Concerns over liquidity continue to linger.
In an effort to provide some respite to the market, representatives
of the Ministry of Finance and the KSE discussed various short term
and medium term measures with the State Bank Governor, including a
relaxation of regulations regarding bank investments in the equity
market as well as share buyback rules.


3. (U) Moody's Investors Service downgraded the outlook on the
Pakistan government's B2 bond ratings to negative from stable and
lowered the outlook on the B3 foreign currency bank deposit ceiling
to negative signaling that the next few months could be crucial for
Pakistan's economy and its stock markets.

TEXTILE EXPORTS DOWN
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4. (SBU) While Pakistan's overall exports have increased by 18.8
percent year on year during July-August 2008 due to increases in
non-textile manufacturing, textile exports have decreased by 4.2
percent. With textiles and apparel providing 60 percent of
Pakistan's traditional manufacturing export market, officials are
worried that all major subgroups of textile exports have recorded
declines. Readymade garments exports dropped by 3.6 percent, bed
wear exports declined by 12.5 percent, knitwear exports decreased by
8.5 percent, cotton cloth exports decreased by 0.53 percent and
cotton yarn exports dropped 21.2 percent.

OVERALL IMPORTS RISE
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5. (SBU) Pakistan's overall imports increased by 31.7 percent year
on year during July-August 2008. Petroleum imports surged by 88.3
percent and imports of petroleum products soared to USD 1.29 billion
in July-August 2008 from USD 655.7 million in the same period last
year. This marks an increase of 97 percent while imports of
petroleum crude increased by 79.3 percent. Imports of machinery
also increased by 3.4 percent. Textile machinery imports, however,
declined by a very significant 35.3 percent. This substantial
reduction in the economic activity of the textile industry is also
reflected in the aforementioned drop in textile exports. In
Pakistan's once booming telecom sector, the import of mobile phones
decreased by 52.58 percent year on year during the first two months
of the current fiscal year. The introduction of an additional tax
on the import of mobile phones has raised the cost, which in turn
has resulted in a drop in the import of mobile phones. Food item
imports were up by 13.52 per cent to USD 549.025 million in
July-August 2008 over the same period last year.

COMMENT
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6. (SBU) Comment. Until the KSE floor is removed, we do not expect
any major market activity. The floor has effectively disrupted the
free market price mechanism. KSE board members have voted

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unanimously, however, for the continuation of the current floor.
Concerns over external imbalances and foreign exchange reserves are
likely to dictate KSE performance in the future. Also, the
offloading of shares by foreign investors and rapid withdrawal of
foreign investment from the shares market is aggravating the already
severe liquidity crunch. The drop in textile exports combined with
the sizable increase in imports does not bode well for the Pakistani
economy and is only exacerbated by the continuing prolonged
blackouts which impact the sector's overall industrial capacity. End
Comment.

PATTERSON