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Pakistan Financial Markets Overview FY04

Pakistan's financial markets saw significant changes in fiscal year 2004. Interest rates fell to historic lows, the rupee reached its highest point in 3.5 years, and the capital market hit a new peak, while also seeing improvements in depth and liquidity. These developments likely facilitated economic recovery by increasing access to financial services. Money market rates were almost half of the previous year's levels and trading volumes increased. Capital markets were strong as corporate earnings rose 26.5% and 16 public offerings raised nearly $1 billion. However, all markets also experienced volatility reflecting shifting expectations about interest rates and the external account.

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8 views2 pages

Pakistan Financial Markets Overview FY04

Pakistan's financial markets saw significant changes in fiscal year 2004. Interest rates fell to historic lows, the rupee reached its highest point in 3.5 years, and the capital market hit a new peak, while also seeing improvements in depth and liquidity. These developments likely facilitated economic recovery by increasing access to financial services. Money market rates were almost half of the previous year's levels and trading volumes increased. Capital markets were strong as corporate earnings rose 26.5% and 16 public offerings raised nearly $1 billion. However, all markets also experienced volatility reflecting shifting expectations about interest rates and the external account.

Uploaded by

warrior prince
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd

1 Overview

Pakistan’s financial markets witnessed significant changes in FY04. Interest rates


touched a historic low, the Rupee reached a 3½ year high and the capital market too
witnessed a new all-time peak; all
markets also saw improvements in Table 1.1: Financial Market Indicators
depth and liquidity. These percent
developments probably facilitated Money Market Capital Market
the economic recovery by catering FY03 FY04 FY03 FY04
the rising demand for financial

KSE-100 Index
6 m Repo rates

services by the fast recovering Highest 6.7 3.9 Highest 3,402.5 5,620.6
economy.
Lowest 1.5 1.0 Lowest 1,735.3 3,432.6
In money market, the average
repo rates in FY04 were almost Average 4.0 2.0 Average 2,448.5 4,592.6
one half of those prevailing in the Value
Mkt. Cap
Cut-offs
(6 m)

preceding year and the trading Highest 1.7 2.2 (bln Rs) 755.8 1421.6
volumes were much higher. % of
Capital markets were buoyant this Lowest 6.4 1.3 GDP 15.7 26.0
Trading volumes/day

year as corporate earnings


(mln Rupees)

averaged 26.5 percent. Sixteen Highest 62.6 72.0 High 689.2 1,122.5
(mln share)
Turnover

public offerings were floated in


FY04 amounting to almost US$ 1 Lowest 7.6 9.6 Low 16.9 63.1
billion (Rs 55.6 billion). Most of
the new offerings were Average 27.0 29.8 Average 214.3 386.7
oversubscribed. The investor base Forex Market
million US dollars
has also expanded due to the
FY03 FY04 %∆
government’s policy of attracting
Cash inflows 25,239 25,644 1.6
small retail investors to the sale of Cash outflows 19,970 24,923 24.8
shares by public sector Reserve accumulation 11,667 12,389 6.2
companies. The share of market Exchange rate end-June (Rs/US$) 57.8 58.17 -0.64
capitalization in GDP also
increased from 19.7 percent in FY03 to 26 percent in FY04 – an impressive outcome.
The turnover was also much higher.
SBP Financial Markets Review FY04

Subsequently, however, all markets also witnessed periods of volatility reflecting the
changing fortunes of the Pakistan’s external account and shifting expectations on
interest rates. The changes in market expectations were particularly evident, directly
or indirectly, during Q4-FY04 when upward movement in interest rates accelerated
amidst rising inflation, the exchange rate suffered a net annual depreciation (for the
first time in 2½ years), and the momentum of the two year old capital market rally
finally faltered.

Inter-bank foreign exchange market witnessed a high level of activity in FY04. Both
forex inflows and outflows were higher than the previous year. But the net flows
were lower as imports of capital goods and raw material rose by 28.8 percent. In the
last quarter, higher import of oil due to large price hike also exacerbated pressures on
the forex market.

In fact, the volatility in the money and foreign currency market posed significant
challenges to the SBP policy, as it sought to strike a balance between interest rate and
exchange rate stability, containing inflation, and sustaining the growth momentum.
On the positive side, the increased market volatility also led to an increased focus on
risk management by domestic financial and non-financial corporates. This is evident
in the considerable interest in the development of the financial derivatives market.

Another, particularly encouraging development in FY04 was the evident increased


integration of the money and forex market, as the impact of interventions in one was
clearly reflected in the other, indicating the improving efficiency in both markets.
While the capital market is clearly not as closely linked to the other two, it too appears
to be slowly reflecting these trends (e.g. recent interest rate hikes have had a
discernable, albeit temporary, negative impact on the KSE-100).

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