BR Research Newsletter

Inside this:
Impending IMF conditions
Doctoring the sick SOEs

ANALYSES & COMMENTS BY

Of SBPs real estate exposure limits

BR RESEARCH

Evolution of mutual funds

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daily Business Recorder.

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Wednesday, January 08, 2014| BR Research Newsletter |

BR Research Newsletter

Impending IMF conditions

scheme is antithesis to documentation or broadening the tax base. There is going to

be some concerns on this very issue as apparently donors are showing resentment on
such a scheme and IMF may listen to other foreign players operating in the country.

IMFs second review is now due and is expected to be conducted in a few days.
Unlike the first review where the fund had raised red flags on only one condition
(failure to meeting net international reserves), this time around non-compliance is
likely to be observed on a plethora of issues.
The fund was nice enough in giving favour for not meeting the NIR in the first quarter;
but the situation is going to be even worse by the end of second quarter. The
government was expected to raise the NIR by $500 million during the second quarter.
Instead it is down by around $400 million, as the reserves are depleting much faster
than what was anticipated.
Then the issue of shortfall in FBR revenues may emerge this time; and to fulfill its
commitments to the fund, the government may announce a mini-budget to meet
the gap. The governments budgeted tax revenue target of Rs2,475 billion for the
fiscal year was too optimistic, and had been brought down to Rs2,345 billion by the

Then the fund may not be happy on the governments plans of advancing Rs100
billion in the youth loan scheme. For the first time in the IMF-Pakistan history, a
programme is vocal on establishing financial stability and has shown concerns on the
state of a few banks. At such a time, the rolling out of big sums of money from
National Bank in a scheme, which has a very high chance of delinquencies, is not
going to be welcomed by the funds review committee.
Mind you, there are rumours in the market that there are some hidden bad debts on
the balance sheet of NBP, which could be detrimental for the state owned bank.
And the bank does not have the capacity to entertain more toxic assets.
What is going to put off IMF the most is SBPs intervention in the currency market to
stabilize rupee-dollar parity. Question will be raised as to why the central bank is
selling currency in the market at a time when it should be buying. This is a gross
volition of the agreement and rupee may depreciate right after the review.

IMF.
Apart from above mentioned breaches, there are some smaller conditions which
This revised target requires 21 percent growth over the last year. To date, FBRs
revenue growth is at 16 percent. By virtue of that, the government is already short by
Rs100 billion in the first six months. Is the government going to propose new taxation
measures or a mini-budget if the fund insists?
The third objection that can surface pertains to the blanket amnesty scheme of
laundering the black money by investing it in industrial projects. That is a violation of
both the IMF programmes objective and PML-Ns own manifesto as any amnesty

2 | BR Research Newsletter | Wednesday, January 08, 2014

have not been met yet. For instance, the government is supposed to change the
procedure of criminal court as per structural benchmarks till December. But nothing
has happened on it. Then the central bank should have done something about the
capitalization of a few banks in terms of their minimum capital requirement; and the
list goes on about these breaches. Lets wait and see how the IMF reacts.

BR Research Newsletter

Doctoring the sick SOEs

Phillips, who is also a visiting faculty at the Karachi School for Business & Leadership,
noted that cultural clash, quite likely in organisations undergoing change, can be
resolved

Congratulations. If all goes well, the prime minister would have announced the
independent boards of directors of about 20-22 SOEs by this time next week.
Even better is the fact that the nominated BODs have no representation from the line
ministries or the bureaucracy, according to Muhammad Zubair, chairman Planning
Commission, who told this to BR Research in an interview published this Monday.
These would be important developments; for without it, the privatisation process will
be rendered ineffective. An independent board is also important to ensure that the
SOEs follow the corporate governance rules and bring an air of transparency in these
organisations.
It is hoped the boards will take up on corporate governance matters, especially the
public disclosure of their periodic financial accounts and keeping the SOEs outside
the political influence. While that is going to be a gargantuan task, rife with political
frictions, the overall turnaround of these SOEs is going to be an even bigger
challenge.
One hopes that the nominated boards hires the right management which posses the
patience and skills needed to direct the much-needed change in these SOEs.
As Professor Nelson Phillips, Chair in Strategy and Organisational Behaviour at
Imperial College London, told BR Research earlier this year: bringing in new leaders
at the top directorship level is always good, but you also need to bring in new senior
management who can implement new policies and set an example.

3 | BR Research Newsletter | Wednesday, January 08, 2014

by

setting

the

right

human

resource

department

and

clearly

communicating its policies.

In this context, now would be the time for management professors at local business
schools to shine their shops by demonstrating how the new management at Pakistan
Telecommunication Limited, KESC and other previously privatised entities changed
the corporate culture in their respective organisations.
The soon-to-be appointed boards and the management they hire should remember
that while there are no short cuts to changing corporate culture and that
demanding cultural change overnight can in fact backfire, unnecessary delay in
changing corporate culture will lead to nowhere.
Peter Drucker, who hardly needs any introduction, once said culture eats strategy
for breakfast. Had Drucker known the state of Pakistani SOEs, he would have
probably said culture eats strategy for breakfast, lunch and dinner.

BR Research Newsletter

Of SBPs real estate exposure

limits

constituting merely 0.6 percent of the GDP versus over 80 percent of the GDP in
developed economies like US and UK.
Speaking to BR Research Raza said that Pakistani banks are already wary of realestate lending because of poor foreclosure and tenancy laws, absence of long-term
fixed interest rates, lack of institutional framework and secondary mortgage market.
Raza is indeed right. The cumulative real estate exposure of the banking sector, as
of November 2013, was approximately Rs141 billion, which barely made up 3 percent
of the banking sector assets (less risk-free investments). Even in the peak times of
private credit off take in CY07-08, that number hardly touched 5 percent of the
banking sector assets with the absolute high of Rs180 billion reached in 4QCY08.
However, perhaps one would want to consider the possibility that regulation has to
be proactive; and not reactive. Ceilings and floors are informed and implemented
before in time. Besides, while the overall sector is far away from breaching the limit,
there is a possibility that few small banks might have risky level of real estate lending
and hence the regulation would be relevant to them.

The central banks recently announced banking sector regulation has got the real
estate sector antsy.

Bear also in mind that real estate investments or at least a sizeable chunk of it had
been speculative in the booming bygone decade. So from a regulators

The Association of Builders and Developers of Pakistan (Abad) was recently quoted

perspective: the move makes sense for arresting real estate speculation, if any, and

raising reservations over SBPs decision to banks/DFI exposure in the real estate sector

channel the already-shrunk private credit flow to more productive use.

to 10 percent of its advances and investments (excluding risk-free investments in

government securities). An Abad official told a local newspaper that placing such
caps would worsen the housing shortage in the country.

As for Abads housing shortage argument; well thats debatable as well.

First,

because even after linking real estate exposure with advances and investments,
there is a significant room available to the banks to promote housing finance. So lets

Questioning the wisdom behind the regulation, former SBP Governor Saleem Raza

not think of the cap as limiting factor; for as they say, we will cross that bridge when

highlights that mortgage-based financing is already immaterial in the country,

we reach there.

4 | BR Research Newsletter | Wednesday, January 08, 2014

BR Research Newsletter
Second, most of the housing needs are in the low income class which cannot afford
such high-priced mortgage loans advanced by the banks. In this context, the SBP
has already clarified that for the purposes of this cap, subsidized government housing
initiatives and schemes are not to be taken into account.
And this brings us to the second leg of Razas argument. If the government, PML-Ns
or otherwise, are really interested in boosting the housing sector for the poor or for
relatively well-off classes, then much more has to be done aside from launching
subsidized housing schemes. What is needed, as Raza pointed out, are better
foreclosure and tenancy laws, long-term fixed interest rates, institutional framework
and secondary mortgage market amongst a host of other facilitative factors.

5 | BR Research Newsletter | Wednesday, January 08, 2014

BR Research Newsletter

Evolution of mutual funds

at the end of 2012, there were just 3 funds under the fund of funds category,
whereas in 2013, additional 6 funds were launched under the same scheme, thus
taking the total fund size of funds of funds scheme to Rs4 billion from Rs0.59 billion at

The mutual fund industry seems to be backpedalling to expand its footprints by swiftly

the beginning of 2013.

penetrating in new asset classes via a string of new and improved products.
The aggressive marketing and investor awareness initiatives adopted by the asset
Talking about 2013, the year alone scored the launched of 17 new mutual funds as
opposed to only 10 mutual funds introduced in 2012. As of November 2013, new
funds launched during 2013 were able to fetch an additional AUM size of Rs12.4
billion.
With the growing trend in the mutual fund industry, asset management companies
are constantly making imperative strides to increase their investor base by bringing in
cutting-edge mutual fund products to cater the demands of existing and potential
investors.
As of today, there are a total of 148 open-end funds and 5 close-end funds in
Pakistan. In line with the number of funds, the size of the asset management industry
has tremendously grown over the past as it has been able to gather funds worth
Rs351 billion as of November 2013, up from Rs180 billion in January 2010.
Intriguingly in 2013, with the equity market jacking up to touch fresh highs, the
inclination was spotted towards funds that are able to take advantage of rising
equity market, as 11 out of 17 new funds were those that bear equity exposure in
their asset mix to some extent.
Amongst the stand-of-the-art diversified portfolio allocations offered by these mutual
funds recently, the industry at this instant is rising up to make its way towards the
fund of funds scheme as opposed to conventional equity or fixed income funds. As
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management companies seem to be bearing its fruits as is evident by their aweinspiring performance in terms of returns earned and the asset management size.