Pakistan's Economy Underestimated, Karachi Equities Undervalued
By Riaz Haq
CA
Even with the run-up (in KSE-100) , Andrew Brudenell, manager of the HSBC Frontier Markets Fund (HSFAX) in London, says Pakistan is one of the cheapest markets he follows, at about seven times earnings. He notes that earnings growth has kept pace with the market. The firms, he adds, are typically cash-rich, boast strong return on equity levels in the 20% range, and pay good dividends. In Pakistan, the informal, cash-based economy for goods and services is larger than the formal economy. Barron's, November 17, 2012
The growing gap between dismal official economic statistics and consumption boom coupled with strong corporate profits in Pakistan are a challenge for many analysts around the world. Most believe that Pakistan's GDP is, in fact, much larger and growing faster than the government data indicates.
Informal Economy Estimates
M. Ali Kemal and Ahmed Waqar Qasim, economists at Pakistan Institute of Development Economics (PIDE), have published their research on estimates of the size of Pakistan's informal or underground economy. Kemal and Qasim explore several published different approaches for sizing Pakistan's underground economy and settle on a combination of PSLM consumption data and mis-invoicing of exports and imports to conclude that the country's "informal economy was 91% of the formal economy in 2007-08".
Here are the figures offered by the authors for 2007-8: 1) Formal Economy: Rs. 10,242 billion= $170 billion (using Rs.60 to a US dollar). 2) Informal Economy: Rs. 9,365 billion = $156 billion. 3) Total Economy (Sum of 1 & 2): Rs. 19,608 billion = $326 billion. Assuming that the ratio of formal and informal economy remained the same in 2011-12, here are the figures for Pakistan's total economy as of the end of last fiscal year which ended in June, 2012: 1) Formal Economy: $210 billion2) Informal Economy: $191 billion3) Total Economy: $401 billion.
Naween Mangi of Businessweek , in her piece titled "The Secret Strength of Pakistan's Economy," described how Pakistan's informal cash-based economy evades the government's radar, illustrating it with the story of a tire repair shopowner Muhammad Nasir. Nasir steals water and electricity from utility companies, receives cash from his customers in return for his services and issues no receipts, pays cash for his cable TV connection, and pays off corrupt police and utility officials and local politicians instead of paying utility bills and taxes.
Karachi Stock Market
A string of strong earnings announcements by Karachi Stock Exchange-listed companies and the Central Bank's 1.5% rate cut have helped the KSE-100 index exceed 16,000 level, a gain of 42.1% (33.2% in US dollar terms) year to date. In spite of this runup in KSE-100 , Andrew Brudenell, manager of the HSBC Frontier Markets fund (HSFAX) in London, remains bullish on Pakistani equities, according to Barron's . Pakistan is one of the cheapest markets he follows, at about seven times earnings. He notes that earnings growth has kept pace with the market. The firms, he adds, are typically cash-rich, boast strong return on equity levels in the 20% range, and pay good dividends.
Conclusion
While Pakistan's public finances remain shaky, it appears that the country's economy is in fact healthier than what official figures show. It also seems that the national debt is much less of a problem given the debt-read GDP ratio of just 30% when the informal economy is fully comprehended. Even a small but serious effort to collect more taxes can make a big dent in budget deficits. My hope is that the increasing share of the informal economy will become documented with the rising use of technology. Bringing a small slice of it in the tax net will make a significant positive difference for public finances in the coming years.
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