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 - - - - - - - - - - - ¶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 - - - - - - - - - - - ¶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 - - - - - - - - - - - ¶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 -------------- ¶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 ISLAMABAD 00003156 002 OF 002 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