Identifier
Created
Classification
Origin
08KARACHI636
2008-12-11 11:43:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Karachi
Cable title:
KARACHI - STOCK EXCHANGE DIRECTOR FEARS MASSIVE
how-toVZCZCXRO3687 OO RUEHLH RUEHPW DE RUEHKP #0636/01 3461143 ZNR UUUUU ZZH O 111143Z DEC 08 FM AMCONSUL KARACHI TO RUEHC/SECSTATE WASHDC IMMEDIATE 0834 INFO RUEHDO/AMEMBASSY DOHA PRIORITY 0062 RUEHIL/AMEMBASSY ISLAMABAD PRIORITY 0298 RUEHBUL/AMEMBASSY KABUL PRIORITY 0189 RUEHLO/AMEMBASSY LONDON PRIORITY 0247 RUEHML/AMEMBASSY MANILA PRIORITY 0058 RUEHNE/AMEMBASSY NEW DELHI PRIORITY 1777 RUEHLH/AMCONSUL LAHORE PRIORITY 2614 RUEHPW/AMCONSUL PESHAWAR PRIORITY 4497 RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY RUEATRS/DEPT OF TREASURY WASHDC PRIORITY RUEAIIA/CIA WASHDC PRIORITY RUEKJCS/SECDEF WASHDC PRIORITY RHMFIUU/CDR USCENTCOM MACDILL AFB FL PRIORITY RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
UNCLAS SECTION 01 OF 02 KARACHI 000636
SENSITIVE
SIPDIS
E.O. 12958: N/A
TAGS: ECON EINV SOCI PK
SUBJECT: KARACHI - STOCK EXCHANGE DIRECTOR FEARS MASSIVE
DROP
REF: A. KARACHI 443
B. KARACHI 501
C. ISLAMABAD 3560
D. KARACHI 512
UNCLAS SECTION 01 OF 02 KARACHI 000636
SENSITIVE
SIPDIS
E.O. 12958: N/A
TAGS: ECON EINV SOCI PK
SUBJECT: KARACHI - STOCK EXCHANGE DIRECTOR FEARS MASSIVE
DROP
REF: A. KARACHI 443
B. KARACHI 501
C. ISLAMABAD 3560
D. KARACHI 512
1. (SBU) Summary: On December 11, the Managing Director of
the Karachi Stock Exchange (KSE) forecast a massive decline
in stock values once the KSE price floor is removed, which he
said could be as soon as December 15. According to him,
Morgan Stanley has notified KSE that it will remove Pakistan
from the Emerging Markets section of its Composite Index, in
a move that could cause Pakistan to hemorrhage up to two
billion dollars in foreign portfolio investment. Post will
continue to monitor the KSE and any domestic reactions. End
summary.
2. (SBU) Karachi Stock Exchange (KSE) Managing Director
Adnan Afridi (protect) told EconOff on December 11 that he
expects a massive drop in the market when selling price
floors are removed, which could occur as soon as next week.
Afridi predicted that market values would drop around 33
percent before share prices began to rebound.
Timeframe to Remove Floors Not Finalized
--------------
3. (SBU) Afridi said Pakistan's Securities and Exchange
Commission would issue the final date to remove the floor
after consulting with the International Monetary Fund (IMF).
KSE senior management, he said, believes the exchange will be
given permission to remove the floor on December 15.
IMF Disallows GOP Bailout Plan
--------------
4. (U) After the floor was installed on August 28 following
a 33-month low in exchange values (ref B),the exchange tried
to remove it on October 27, but demurred because of fears of
a market crash. Since then, the GOP has failed to win IMF
approval for the use of public funds for a proposed USD 618
million program to mitigate the expected price drop (ref C).
The floor limits the minimum sale price to the August 28
closing value.
Off-Market Trades a Portent?
--------------
5. (SBU) Stocks are already trading around 30 ) 40 percent
below KSE listed values in the informal or "off-market"
transactions, Afridi said. While trading in the exchange has
slowed to a few hundred thousand shares a day, off-market
trading now averages around one million shares daily.
Slow Motion Decline?
--------------
6. (SBU) Afridi opined that once the price floor is
removed, the previous market rules limiting price declines to
five percent a day will apply. He expects the market to
continue downward by the maximum (five percent) for 8 ) 9
days, ultimately losing around 3,000 points (about 33
percent) before recovering.
Removal from Index Complicates Future Appeal
--------------
7. (SBU) The future of Pakistan's equity markets was
further clouded by a December 15 Morgan Stanley message to
KSE that it will remove Pakistan from the "Emerging Markets"
Section of its Composite Index (MSCI) effective December 31.
Afridi explained that since many international investment
funds, by-laws require them to invest only in MSCI
countries, Pakistan will lose potentially two billion dollars
in foreign portfolio investment. (Note: Per State Bank of
Pakistan figures, net portfolio investment in the country has
KARACHI 00000636 002 OF 002
declined over USD 489 million from July ) October 2009 in
comparison with the same period in 2008. End note.) Afridi
attributed IMF resistance to removing the floor, despite GOP
urging, as a key factor in Morgan Stanley's decision. He
said he planned to petition the Ambassador for USG assistance
in convincing Morgan Stanley to reverse its decision.
(Comment: An IMF representative told Post that his
organization had not resisted removal of the floor. End
comment.)
Potentially Violent Reaction
--------------
8. (SBU) Afridi was concerned about a violent shareholder
reaction to any additional market downturn. He predicted a
worse reaction than the July riots that resulted in
structural damage to the Exchange and minor injuries.
Apparently coordinated protests also broke out at the smaller
Lahore and Islamabad exchanges on the same day (ref A).
(Comment: While these July riots resulted in some damage to
the KSE building, many believe that these "riots" were staged
by the KSE to garner media attention. End Comment.)
Comment
--------------
9. (SBU) When the market floor is removed, industry leaders
have previously told Post they expected a massive drop in
value (ref D). As the market is often driven by perceptions,
these expectations may exacerbate the downward spiral. The
market's five percent limit on daily declines will prolong
the market crash drama, further eroding investor confidence.
The Morgan Stanley decision to remove Pakistan from its MSCI
could be the biggest blow to date concerning the future of
Pakistan's equity markets. Post will continue to monitor the
KSE and potentially reactions.
FAKAN
SENSITIVE
SIPDIS
E.O. 12958: N/A
TAGS: ECON EINV SOCI PK
SUBJECT: KARACHI - STOCK EXCHANGE DIRECTOR FEARS MASSIVE
DROP
REF: A. KARACHI 443
B. KARACHI 501
C. ISLAMABAD 3560
D. KARACHI 512
1. (SBU) Summary: On December 11, the Managing Director of
the Karachi Stock Exchange (KSE) forecast a massive decline
in stock values once the KSE price floor is removed, which he
said could be as soon as December 15. According to him,
Morgan Stanley has notified KSE that it will remove Pakistan
from the Emerging Markets section of its Composite Index, in
a move that could cause Pakistan to hemorrhage up to two
billion dollars in foreign portfolio investment. Post will
continue to monitor the KSE and any domestic reactions. End
summary.
2. (SBU) Karachi Stock Exchange (KSE) Managing Director
Adnan Afridi (protect) told EconOff on December 11 that he
expects a massive drop in the market when selling price
floors are removed, which could occur as soon as next week.
Afridi predicted that market values would drop around 33
percent before share prices began to rebound.
Timeframe to Remove Floors Not Finalized
--------------
3. (SBU) Afridi said Pakistan's Securities and Exchange
Commission would issue the final date to remove the floor
after consulting with the International Monetary Fund (IMF).
KSE senior management, he said, believes the exchange will be
given permission to remove the floor on December 15.
IMF Disallows GOP Bailout Plan
--------------
4. (U) After the floor was installed on August 28 following
a 33-month low in exchange values (ref B),the exchange tried
to remove it on October 27, but demurred because of fears of
a market crash. Since then, the GOP has failed to win IMF
approval for the use of public funds for a proposed USD 618
million program to mitigate the expected price drop (ref C).
The floor limits the minimum sale price to the August 28
closing value.
Off-Market Trades a Portent?
--------------
5. (SBU) Stocks are already trading around 30 ) 40 percent
below KSE listed values in the informal or "off-market"
transactions, Afridi said. While trading in the exchange has
slowed to a few hundred thousand shares a day, off-market
trading now averages around one million shares daily.
Slow Motion Decline?
--------------
6. (SBU) Afridi opined that once the price floor is
removed, the previous market rules limiting price declines to
five percent a day will apply. He expects the market to
continue downward by the maximum (five percent) for 8 ) 9
days, ultimately losing around 3,000 points (about 33
percent) before recovering.
Removal from Index Complicates Future Appeal
--------------
7. (SBU) The future of Pakistan's equity markets was
further clouded by a December 15 Morgan Stanley message to
KSE that it will remove Pakistan from the "Emerging Markets"
Section of its Composite Index (MSCI) effective December 31.
Afridi explained that since many international investment
funds, by-laws require them to invest only in MSCI
countries, Pakistan will lose potentially two billion dollars
in foreign portfolio investment. (Note: Per State Bank of
Pakistan figures, net portfolio investment in the country has
KARACHI 00000636 002 OF 002
declined over USD 489 million from July ) October 2009 in
comparison with the same period in 2008. End note.) Afridi
attributed IMF resistance to removing the floor, despite GOP
urging, as a key factor in Morgan Stanley's decision. He
said he planned to petition the Ambassador for USG assistance
in convincing Morgan Stanley to reverse its decision.
(Comment: An IMF representative told Post that his
organization had not resisted removal of the floor. End
comment.)
Potentially Violent Reaction
--------------
8. (SBU) Afridi was concerned about a violent shareholder
reaction to any additional market downturn. He predicted a
worse reaction than the July riots that resulted in
structural damage to the Exchange and minor injuries.
Apparently coordinated protests also broke out at the smaller
Lahore and Islamabad exchanges on the same day (ref A).
(Comment: While these July riots resulted in some damage to
the KSE building, many believe that these "riots" were staged
by the KSE to garner media attention. End Comment.)
Comment
--------------
9. (SBU) When the market floor is removed, industry leaders
have previously told Post they expected a massive drop in
value (ref D). As the market is often driven by perceptions,
these expectations may exacerbate the downward spiral. The
market's five percent limit on daily declines will prolong
the market crash drama, further eroding investor confidence.
The Morgan Stanley decision to remove Pakistan from its MSCI
could be the biggest blow to date concerning the future of
Pakistan's equity markets. Post will continue to monitor the
KSE and potentially reactions.
FAKAN