How to Make Pakistan Capital Markets More Sustainable

Published October 15, 2022

Detailed notes from talk by Mr. Ali Naqvi, Founder & CEO of Aletheia Capital, at 20th Anniversary Celebration Event of CFA Society, Pakistan, on Saturday 1^st, October, 2022.

Mr Ali Naqvi started his career in Pakistan Capital Markets in 1993 and moved to Credit Suisse in 1998 where he worked for almost two decades, before assuming the position of Executive Chairman/Head/Co-Head of Global Markets. He then founded Alethia Capital, Asia’s First Full Scale and Largest Independent Investment Advisory Firm.  Detailed notes from his talk are below:

Recalling his early days in Pakistan Capital Markets

Mr Ali Naqvi recollected USD 988 million GDR for PTCL (Pakistan Telecommunication Company Ltd) in the 1990s which was then the largest telecom deal in global emerging markets. He said his diverse experience of emerging markets underpins his confidence on the potential of Pakistan’s Capital Markets.

Thoughts on Pakistan’s Regulatory Bodies

He appreciated the quality of regulators in Pakistan and said that our regulators are very progressive in comparison to most of the regulators in the region. They are willing to talk and listen.

The profit-making opportunities drive the interest of investors in the Stock Market but Pakistan’s boom bust cycles drive investors away

The dynamics of Pakistan’s stock market have improved, but the liquidity needs to improve substantially. However, liquidity is a function of the investors’ interest in the market. Interest in the market is not driven by attempts to facilitate retail investor participation. Retail investors would come in when they would believe they can make money in the market.

The main hindrance here is that Pakistan has a boom-bust cycle and does not have a continuous and sustainable growth story, which makes it difficult to keep the investors interested in the market. The price of people leaving the market is high because it is extremely difficult to bring them back.

Pakistan has been fortunate enough to receive foreign investments in last two decades

Pakistan benefited substantially from two main factors during the last two decades. The first is low interest rate environment globally, which created a lot of liquidity. When liquidity is high, it flows into tier 3 and tier 4 markets, which are essentially illiquid assets like Pakistan. In the last 20 years, this high liquidity flowed into high-risk assets such as frontier markets, high risk emerging markets and startups etc.

The second factor is that Pakistan’s geopolitical situation continued to be favorable, and the country was able to raise funds as a result events like 9/11, from countries like the United States, the UAE and Saudi Arabia, which allowed us to weather every boom-and-bust cycle during the last two decades.

Three factors have fundamentally changed the world and will be they key challenges for Pakistan

COVID-19 has dramatically altered the world, which was previously changing at a slower pace. These changes will become more noticeable over the next 20 years. Three factors have had a fundamentally transformational impact on the global economy and will be the key challenges for Pakistan.

1. Rising US inflation caused by COVID stimulus is driving global interest rates upwards
2. US is retreating as a global geopolitical power
3. We are moving towards a divided world as countries would move away from the US dollar

Challenge 1: Rising US inflation caused by COVID stimulus is driving global interest rates upwards

The low interest rate environment is gone. As a result of COVID, an average American has received USD 48,000 during the last 3 years and they have been really spending it like crazy because they hadn’t seen such money before.

This is very different from the Quantitative Easing that was happening since 2008 financial crisis. More money in people’s hands is driving up prices and causing higher inflation in the US. Because of high inflation, the US must raise interest rates, which is causing the US dollar to appreciate.

He warned that the situation facing the United Kingdom i.e the steep depreciation of pound sterling is most likely to happen to many other countries. As a result, we will experience a high interest rate environment across the globe.

Challenge 2: US is retreating as a global geopolitical power

The second factor is that the US is retreating as a global geopolitical power. Once the retreat is complete, the dynamics of the Middle East and US-China relationship will completely change. Even though these regional powers (Middle East and China) now have more money than they used to have before, their need to help us and fund us would go down substantially once the US retreats.

Since the Middle East is mending their relationship with Iran and Israel, they will no longer need to rely on Pakistan for their security. We will receive far less money from them in the next 20 years. This will negatively affect our finances, our economy, and our markets. Money flowing in from the Middle East and China were the tail winds of the last two decades and it will be headwinds during the next two decades.

Challenge 3: We are moving towards a divided world as countries would move away from the US dollar

For the first time ever, US took Russia out of the SWIFT system because of Russia Ukraine war. This has never happened before as the global systems continued irrespective of wars. This will result in a divided world as people will turn away from the US dollar due to the fear of being plucked out of SWIFT for not toeing the US line. This is bearish for the US dollar in the medium to long term. There will be pressures on Pakistan also, to pick sides.

Pakistan has been found out and needs to fix the mess

Pakistan has been able to bring a new investor segment during each boom-bust cycle as we were able to find someone willing to invest as they didn’t know our background and history. VC investors investing in Startups are the most recent investor segment. Most of the VCs are in their 20s and 30s and lack knowledge of Pakistan’s 30-year history. VCs are flushed with money to invest, and Pakistan story looks strong with a potential ROI on 220 million people. So they came in thinking that they will make money. They too will learn the dynamics later.

Pakistan has been found out and now it needs to find the solution to the core problems. We know the problems and the solutions. The key question is that whether those who are elected to power will be able to execute the strategy? We need to fix this mess in the next 5 years, otherwise the way the numbers are, it will not be sustainable beyond that.

Pakistan can transform itself very quickly if we focus on exports; services exports is a huge opportunity

The solution is not very difficult. Our deficits in absolute terms are not very big. If we put ourselves on a sustainable growth path, getting liquidity is not the problem. We have a huge human resource potential. Be it Information Technology or Financial Services, we have a huge opportunity to export our services. US currently has a services-based inflation as they have a deficit in the labor force.

Words: 1165

Read time: 0 Minutes