SINDH - KARACHI STOCK EXCHANGE HITS 33 MONTH LOW

UNCLAS KARACHI 000501

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON PK
SUBJECT: SINDH - KARACHI STOCK EXCHANGE HITS 33 MONTH LOW

REFTEL: (A) KARACHI 443 (B) ISLAMABAD 2631
(C) ISLAMABAD 2761


1. (SBU) Summary: Share values on the Karachi Stock Exchange
(KSE) plunged to a 33-month low by the end of trading on August 27,
to close at 9,144.93, down 285.36 points for the day. Despite media
reports of civil unrest outside the exchange, police and KSE
officials confirmed there was no violence and that KSE trading was
not suspended. Political uncertainty and declining macroeconomic
indicators were the major causes behind the rapid drop. Fearful of
the potential impact on the economy and seeking to allow the
financial system time to rebound, the KSE Board voted to make the
level at August 27 close-of-trading the floor below which the KSE
will not be allowed to go, at least for an unspecified period of
time. End summary.


2. (SBU) On Wednesday, August 27, the Karachi Stock Exchange (KSE)
100 index closed at its lowest level since November 29, 2005 when it
was at 9,135.54. The KSE 100 opened the day at 9,430.29 and was
down as much as 430.93 points before rebounding to close at
9,144.93, down 285.36 points. The declining rupee value against
major currencies kept most foreign traders on the sidelines. Total
shares traded on August 27 were 94.43 million. The biggest declines
of the day were posted by Siemens Pakistan, Jehangir Siddiqui, Shell
Attock Oil Refinery, and Pakistan State Oil. According to a senior
research analyst at Arif Habib Securities, the market decline was
driven by political uncertainty, high interest rates, and declining
macroeconomic indicators (including shrinking foreign exchange
reserves). Per market guidelines, shares can only fluctuate by
three percent before trading is frozen, which helped mitigate the
August 27 decline.


3. (SBU) The KSE 100 has depreciated 41.6 percent since reaching
an all time high of 15,676.34 on April 18, 2008. Although August 27
trading was not suspended and the KSE closed at normal closing (2:15
PM),Afridi told EconOff the KSE Board met for 11 hours on August
27-28 due to concerns over how the drop might impact the rest of the
financial system. Attempting to "give the market time to recover,"
the Board determined to make the level at August 27 close-of-trading
the floor below which the KSE would not be allowed to go. Afridi
said he did not know how long this measure would be in place, but
speculated it could last up to 15 days.


4. (SBU) Calling the price drop a "crisis of confidence," Afridi
opined that the decline was the result of uncertainty over the
country's political future, high oil prices, a declining rupee, and
a perceived lack of government focus on economic issues. From a
market standpoint, he said that many stocks are now significantly
undervalued, with some selling for as little as two times their
price-earnings ratio.


5. (SBU) Comment: In contrast to the July 17 (Reftel A) and
August 4 (Reftel B) market drops, reaction to the market decline has
thus far been mild. Although media reported disturbances at KSE,
police told RSO, and KSE Managing Director Afridi confirmed, that
there were no civil disturbances and the KSE was able to complete
its normal business day without disruption by protestors. The
market's decline is more evidence of lack of foreign investor
confidence in Pakistan and wariness about its precarious economic
situation (Reftel C). The Karachi business community accuses the
GOP of allowing other issues, such as restoration of the judges,
distract them from addressing issues such as the country's rising
inflation rate, declining foreign reserves, and depreciating
currency. A clear GOP public statement of economic policy would
provide some comfort to investors, giving more indication that the
GOP is not so focused on political issues that it will let the
country's economy unravel.

ANSKE