Economic Affairs by Bilal Ilahi

8/7/2019 Economic Affairs by Bilal Ilahi

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LUMS1st Session. 9am-11.30


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BILAL ILAHI

Educational Qualification:

1977: Masters in Business Administration

(U.S.A).1973: B Com. Punjab University (Hailey

College).


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Teaching Experience:

2002- Present: Taught MBA, EMBA , BBA

, classes at Beacon house Business School /

Curtin University Lahore, GovernmentCollege University Lahore, LUMS, ICBS as

part of their visiting faculty.


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Corporate Training Experience:

2007-Present:

Conducted Seminars and Workshops for

Institute of Chartered Accountants ofPakistan, PSO, The Civil Services Academy,

MCB, Bank of Punjab, UBL, Bank Alfalah,

ABL, HBL, National Bank of PakistanNIBAF & NIPA.


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Other:

Global Markets Analyst for CNBC PakistanTV, Business Plus TV and Dawn TV.

Contributed articles to The Business

Recorder and Dawn.

Editor mbazonepakistan.com

(e-magazine)


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Almost 90% of the financial pages are:

1.) MARKETS. Eg. Stock market, crude

oil, cotton, foreign exchange etc .

2.) MONETARY POLICY. E.g.. Interest

rates, Inflation, Central banks, S.B.P,etc.

3.) FISCAL POLICY. E.g.. Budget etc.

4.)INTERNATIONAL TRADE & W.T.

E.g. Exports, Imports, Asean.


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Workshop Sequence :

1.FISCAL POLICY.

2.MONETARY POLICY.

3.MARKETS:a.) Currencies. b.) Commodities

c.) Capital.5. INTERNATIONAL TRADE.


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MACRO-ECONOMIC POLICY

=

FISCAL POLICY

+

MONETARY POLICY.


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The objective of MACRO - ECONOMICpolicy is to have sustainable GDPGROWTH while containing INFLATIONand achieving an acceptable rate ofUNEMPLOYMENT.

The fact that GDP rises or falls shows

that BUSINESS CYCLESare unavoidableand MACRO-ECONOMIC policy can neverreally conquer them.


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GDP GROWTH. Country's annual output

and of good & services. Same as economicgrowth.

UNEMPLOYMENT. The number of peopleof working age without a job as apercentage of the workforce.

INFLATION. Rising prices across theboard.


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GDP. = C + G + I + ( X - M ) .

Consumption

Governmentspending

Exports

Business

Investment

Imports.

GDP can be calculated by adding the total valueof a

countrys annual OUTPUT of goods & services.

(Consumer)


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GDP UNEMPLOYMENT

purchasing power INFLATION There is a trade off betweenINFLATION and UNEMPLOYMENT.

The lower the UNEMPLOYMENTRATE the higher is the INFLATION

RATE.

Governments have to choose betweenthe two evils.


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Too much GDP growth will causean increased rate of inflation calledoverheating in the economy. (e.g.concern in China today) which can

lead to a quick recession and a hardlanding.


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FISCAL POLICY

One of 2 parts of Macroeconomicpolicy.

FISCAL POLICY comprises

TAXATION and PUBLIC SPENDING.

It is used to influence the level of

DEMAND in a economy with thegoals of UNEMPLOYMENT as low aspossible without excess INFLATION.


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FISCAL POLICY is targeted onlong - term goals.

MONETARY POLICY is used forshort-term adjustments.


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PAKISTANS ECONOMY

Per capita GDP : $ 1,085 (07-08)Conversion @ Rs.61 !

GDP : $ 160 bn.Black economy , FBR estimate 35%.Huge potential for additional taxes.


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BUDGETARY DEFICIT. The amount ofdeficit divided by GDP.E.g. 4.2% (revised) for 08-09 in

Pakistan. Actual = 5.3% Budgetary deficit leads to highergovernment bank borrowing which leads

to the crowding out affect which lead tohigher interest rates which leads toslower GDP growth.


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Fiscal Deficit is one of the main

cause of high inflation rate inPakistan. Reasons behind FiscalDeficit:1.Low Tax / GDP ratio. Low tax base.2.Defense expenditure.

3.Wasteful government expenditure.4.Protection and favorable treatmentto special interest groups.


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National Security ?

Where does Pakistan stand ?The Big Issues

Energy security

Food security

Water security

These 3 are connected !!


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MONETARY POLICY

One of the two tools of MACRO-ECONOMIC POLICY and the side-

kick of FISCAL POLICY. Objective of both FISCAL &

MONETARY POLICY is to have aneconomy with GDP growth, relativelyfull employment and stable prices.


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The function of a Central Bank is tocontrol INFLATION andUNEPLOYMENT while managingsustainable GDP GROWTH.


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ECONOMIC SPEED LIMIT orPOTENTIAL RATE OF GROWTH orTREND RATE OF GROWTH is the

same thing.The pace at which the economy cangrow without fuelling inflation ie.

without getting overheated.


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For inflation to fall the economy hasto grow below its TREND RATE OF(GDP) GROWTH

Higher TREND RATE possible ifproductivity( US under Clinton)and / or labor supply e.g. China

was adding 10 million workers ayear to its workforce.


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GDP growth Unemployment

Inflation Interest Rates Inflation


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Central Banks:

U.S.A - THE FEDERAL RESERVE (THE FED)

U.K. - THE BANK OF ENGLAND (B.O.E)

E.U. - THE EUROPEAN CENTRAL BANK. (E.C.B)

JAPAN- THE BANK OF JAPAN (B.O.J)

INDIA- THE RESERVE BANK OF INDIA (R.B.I)

PAKISTAN- THE STATE BANK OF PAKISTAN .


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Foreign exchange reserves (also called Forexreserves) in a strict sense are only the foreign

currency deposits held by central banks.However, the term foreign exchange reserves

commonly includes foreign exchange, gold, SDRs

and IMF reserve position. Same as official reserves.These are assets of the central banks which are held

in different reserve currencies such as the dollar,

euro, yen and pound, and which are used to back its

liabilities, e.g. the local currency issued.

Before the end of the gold standard, gold was the

preferred reserve.


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FOREIGN EXCHANGE RESERVES.

INFLOWS : EXPORT PROCEEDS. REMITTANCES ..

. (INWARDS)

. FDI

. FPI

. FOREIGN AID. FOREIGN BANK LOANS

. I.M.F. LOANS


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FOREIGN EXCHANGE

RESERVES IN ASIA. (Nov 2009)China $ 2,400. bn.

Japan $ 1,074. bn.

Taiwan $ 348. bn.South Korea $ 270. bn.

India $ 287. bn.

Hong Kong $ 256. bn.Malaysia $ 97. bn.

Pakistan $ 13. bn.


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Global Central Bank Reserves.

24% of total reserves of majorcentral banks are in gold.63% of currency reserves are $.

27% // // Euros.

Is it now in the interest of foreign

governments ( e.g. China ) thatthe U.S. economy should bevulnerable or be at risk ? ?


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MARKETS


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Markets are at the centre of everysuccessful economy

Joseph Stiglitz.. Noble Prize winning economist.

MARKETS


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MARKETS

ECONOMICS

SUPPLY & DEMAND

MARKETS

A price clearing mechanism

PRICE

PROFIT or LOSS

REALLOCATION OF

RESOURCES IN THE

ECONOMY

PHYSICAL or VIRTUAL


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MARKETS

GLOBAL

LOCAL

LABOUR REAL ESTATE

STOCK MARKET.(KSE, NYSE)

BOND MARKET. (KSE)

OIL. (IPE, NYMEX)

COTTON. (NY ,KCE)

COPPER.(LME)

CAPITAL

COMMODOTIES

CURRENCIES

HARD CURRENCIES-$ Y

OTHER-prs, Inr


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CURRENCIES

U S $

Euro

Yuan (China)


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BALANCE OF PAYMENTS.

Can affect the value of a currency &

exchange rates with little relation to

what it should be worth.


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A country can sustain a current account

deficit for years without suffering

because of its comparison to GDP.( not

over 5% for USA).

Also deficit may be caused by import oftechnology and capital goods which may

improve productivity and help controlinflation.


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3 main drivers of currency movements:

1.Valuation.i.e. the PPP theory.

2. Momentum also Trending.

3.Carry Trade. e.g. portfolio flows. FPI

now far bigger than trade flows


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Purchasing Power Parity (PPP).

Method of calculating the correct valueof a currency as opposed to the current

value. Goods and services should cost

the same in all countries.

PPP indicates the approximate exchange

rate to use when expressing prices indifferent countries in a common

currency.


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PPP helpful in comparing living

standards. Purchasing power of eachcurrency relative to the $.

Currencies should be worth based on

fundamental measures of value. Does

not happen in real life !


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Carry Trade.

Risk Appetite (flight from safety)Leveraging

Carry TradeFunding Currency (eg Yen or $)

Portfolio Flows (eg into New Zealand)

Target Currency ( New Zealand $)


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Unwinding Carry Trade.

Risk Appetite (risk averse)

Leveraging

Carry TradeFunding Currency (eg Yen or $)

Portfolio Flows (eg out of NZealand)

Target Currency (New Zealand $)


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Funding Currency; low yielding

currency.Target Currency; high yielding

currency.

The longer and bigger the Carry

Trade, the larger the asset bubble and

bigger the bubble crash.


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The value of the Yen in following 5

years was linked to risk appetiteand consequent demand and value of

funding and target currency.

2004. NZ$ = 44 Yen (Jap).

2007 3rd Qtr. NZ$ = 96 Yen.

2009, 1st Qtr. NZ$ = 44 Yen.

U.S. $


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U.S. $The pre-eminent global currency.

The IMF counts 13 countries using$ as their currency eg. Ecuador.

$ 350 bn. are held outside of USA.Half of all notes in circulation.

$ is 86% of one side of all currency

deals.


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THE U.S. Economy (GDP)= $ 14 tr.

GDP growth (- 2.5%) in 2009.

Consumer spending is 70% of GDP.

University of Michigan's ConsumerConfidence Index is a key indicator.

Stimulus via tax credits as a result ofthe recent $787bn stimulus plan


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THE FED, The Federal Reserve, is

the central bank of the USA.

The FOMC carries out O.M.O. (open

market operations) to control liquidityand inflation and sets Interest Rates.

Federal Funds Rates =0%-0.25%


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Interest rates in turn affect valueof $.

U.S. Monetary policy (e.g. changein interest rate) takes 6-9 months totake affect.


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Worldwide currency markets arefocused on the meeting of FOMC( every 1 month).

-Is the INTEREST RATE on the US

$ going up or not ?

-What will the beige book say?


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Interest Rates affect the US$ Eg.U.S. GDP

Unemployment

InflationInterest Rates

U.S.$.


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Central banks difficulty in reducing

the US $ in their RESERVES :

Majority of the countries export to

US therefore regular flow of $.80% of Pakistan's exports are

invoiced in $ but only 25% exportsare for the US.

Sub-prime mortgage problem.


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Sub prime mortgage problem.

Caused by a bubblei.e. when the

price of an asset rises far higher thancan be explained by fundamentals.

As house prices go up home-ownersspend more the wealth effect.

Consumers are 70% of the economy.

Residential construction 5% of GDP.


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Credit squeeze as banks refuse to

lend to each other after downturn inUS housing sector.

US mortgage debt is $12 tr.Sub-prime mortgages $2.3 tr.

Downward pressure on US housingmarket & GDP growth


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ECBs medium-term inflation target

is 2% (Growth and stabilitypact of EU for the Eurozone).

Under the pact budgetary deficitcannot exceed 3% of GDP.

ECBs interest rate is 1%.


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YUAN (China)

$ 5.3 tr. Chinese economy. Only 5%of global GDP. But 1/3 of totalincrease in global GDP in 2006.

Leaders now want to shift theeconomy.

From exports and fixed investmentto consumer led economy.


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CHINESE YUANUNDERVALUED.

Record-breaking trade surpluseswith the U.S. which should havecaused the Yuan to appreciate.

From 1994 to 2005 --------

Fixed peg @ 8.28 Yuan / $allowing the currency to fluctuate

only in a narrow band How was the FIXED PEG of 8.28Y/$


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How was the FIXED PEG of 8.28Y/$

employed successfully.??

1. EXPORTS GDP YUAN EXPORTSGDP

2. P.B.O.C (Chinas Central Bank) buys U.S $,sells Yuan.

3. $ YUAN (8.28Y/$) EXPORTS

4. Above action releases too much liquidity

(YUAN) in the economy.

5 MONEY SUPPLY INFLATION


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5. MONEY SUPPLY INFLATION

6. P.B.O.C. does O.M.O to suck in excessmoney supply / liquidity .It sells Government

Securities and buys Yuan. Repeated action

pushes interest rates up !!

MONEY SUPPLY INTEREST RATES

INFLATION


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7. High Interest rates cause businesses to slowdown.

8. Exports GDP

9. Subsidies on interest rates by the government

& The Communist Party for export industries.

10. INTEREST RATES EXPORTS GDP .

------- and the cycle continues ! ! !

On 21 July,05 Landmark .The


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ydeath of the Yuan-$ peg.

The yuan climbed 21% against thedollar from 2005 to 2008, when

China adopted a managed-floatcurrency system under which theYuan's value was linked to a basket

of currencies.

But the Yuan has been kept almost


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punchanged against the dollar since

the outbreak of the global crisis tohelp Chinese exporters, which hasprompted much criticism from

abroad.

Is it now in Chinas interest to see

the U.S. economy weaken.?AND the U.S.$ to weaken ? ?

USA wants more Yuan appreciation


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Concerns of the U.S. and other

countries.But also aid China in its effort to

tackle domestic inflation and asset

bubbles, and to encourage increased

domestic consumption. Such a move

"is in its own interests


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COMMODITIES.

CRUDE OIL

COTTON

PALM OIL

IRON OREGOLD


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CRUDE OIL

Th h f CRUDE OIL i
http://upload.wikimedia.org/wikipedia/commons/b/ba/Gulf_Offshore_Platform.jpg


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The share of CRUDE OIL inPakistans total imports is 23 %.We import 82 % of our needs.

Pakistans CRUDE OIL import isthe prime cause of our TRADEDEFICIT.

Energy Equation


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Energy EquationEnergy =

Crude oil+Natural gas

+Coal

+Nuclear+Renewable energy

(hydro electric + wind + solar +

hydrogen fuel cell)

+Alternative fuels

e hanol + bio die el + bio
http://upload.wikimedia.org/wikipedia/commons/4/4e/Pleiades_large.jpghttp://upload.wikimedia.org/wikipedia/commons/4/4e/Pleiades_large.jpg


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Types of Oil

There are 161 different

internationally traded crude oils.

They have different characteristicsquality and market penetration.


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Cont


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Cont

Prices for other crude oils are set atdifferential to them.

Other oils are Saharan blend(Algeria), Minas (Indonesia),Bonny Light (Nigeria) Arab light

(Saudi-Arabia), Fatah (Dubai),Mexicos Isthmus, VenezuelasTia juana


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Measurement of Oil

1 Barrel = 159 liters
http://images.google.com.pk/imgres?imgurl=http://www.ocean.udel.edu/oilspill/images/barell.jpg&imgrefurl=http://www.ocean.udel.edu/oilspill/crudeoil.html&h=472&w=352&sz=57&hl=en&start=3&tbnid=im2kL_h3CZjcrM:&tbnh=129&tbnw=96&prev=/images?q=crude+oil&sv


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RESERVESPRODUCTION

CONSUMPTION


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Cont

66 % of reserves are in Muslimcountries while USA has 3% only.

Saudi-Arabia and Iran have 25 %and 10% respectively.


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Price


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Price

Internationally the price of oil isset in US dollars per barrel, by theforces of demand and supply.

The most important futures oilmarket is NYMEX (New YorkMercantile Exchange).

Demand Factors


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Oil demand is dependent on:

1.Global economic growth.

2.Changes in technology ie. solarpower.

3. $ falling. Makes oil moreattractive for holders of appreciatingcurrencies like Euro. Hence demand

goes up


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Demand Factors. contd..

USA summer driving season(memorial day to labor day)

US north east winter season

China

India


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USA.

US summer driving season.

US Northeast winter season.


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Supply Factors


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Supply Factors

Supply interruption of more than5% for over 6 months creates a

crisis in the oil markets.

40% of worlds supply comes fromOPEC. Daily ceiling of 27 mn. bpd.

Supply Factors


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Supply Factors Saudi Arabia.

Iraq, Iran, Nigeria.

OPEC.

Venezuela. Choke points

Hurricane season. Tanker capacity & Refinery capacity.

Strategic reserves of USA, Japan &

India
http://upload.wikimedia.org/wikipedia/commons/b/ba/Gulf_Offshore_Platform.jpghttp://upload.wikimedia.org/wikipedia/commons/b/ba/Gulf_Offshore_Platform.jpg


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Supply Factors

Saudi Arabia. Iraq, Iran, Nigeria.

OPEC.

Venezuela.

Choke points

Hurricane season. Tanker capacity & Refinery capacity.

Strategic reserves of USA, Japan and India.


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Choke point is a geographical


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Choke point is a geographicalfeature. Same as a bottle neck.They are narrow and theoreticallycan be blocked. Threat comes from

hostile governments, terroristgroups, and piracyEffects of closing of choke points

are increased costs because oftransit time increase and tankers

capacity tie up


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Straits of Hormuz


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It has two 1-mile-wide channels formarine traffic separated by a 2-mile-wide buffer zone.

Only sea passage to the open oceanfor the petroleum exporting Persian

Gulf States. Some 40 percent of the world's oil

supply passes through the strait.


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US receives 12% of its oil and

Western Europe 25% and Japan get66% of their oil respectively.

15% of the world's commerce isrouted through Hormuz.


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Supply Factors


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Supply Factors

Saudia Arabia. Iraq , Iran, Nigeria.

OPEC

Venezuela

Choke points

Hurricane season Tanker capacity & Refinery capacity

Strategic reserves of USA, Japan & India

Hurricane season
http://upload.wikimedia.org/wikipedia/commons/b/ba/Gulf_Offshore_Platform.jpg


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In oil markets hurricane seasonrefers to hurricanes in Gulf of Mexico.

US Gulf oil production (offshore oil) is25% of total US production and 15%of its total natural gas production.

Just before the arrival of a hurricaneoff-shore facilities have to close

down


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http://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gif


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Important Hurricanes
http://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gif


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Hurricane KatrinaFormed August 23, 2005

Dissipated August 31, 2005

Highest

winds175 mph (280 km/h) (1-

minute sustained)

Lowest pressure 902 mbar (hPa; 26.65 inHg)

Fatalities 1,836 total

Damages $81.2 billion (2005 USD)

$84 billion (2006 USD)(Costliest Atlantic hurricane in history)

Areas

affected

Bahamas, South Florida, Cuba, Louisiana

(especially Greater New Orleans), Mississippi,

Alabama, Florida Panhandle, most of eastern

North America
http://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/August_23http://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/2005http://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/August_31http://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/2005http://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Mphhttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Km/hhttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Mbarhttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/HPahttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/InHghttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Atlantic_hurricanehttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Bahamashttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/South_Floridahttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Cubahttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Louisianahttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Greater_New_Orleanshttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Mississippihttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Alabamahttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/Florida_Panhandlehttp://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gifhttp://en.wikipedia.org/wiki/North_Americahttp://en.wikipedia.org/wiki/North_Americahttp://en.wikipedia.org/wiki/Florida_Panhandlehttp://en.wikipedia.org/wiki/Alabamahttp://en.wikipedia.org/wiki/Mississippihttp://en.wikipedia.org/wiki/Greater_New_Orleanshttp://en.wikipedia.org/wiki/Louisianahttp://en.wikipedia.org/wiki/Cubahttp://en.wikipedia.org/wiki/South_Floridahttp://en.wikipedia.org/wiki/Bahamashttp://en.wikipedia.org/wiki/Atlantic_hurricanehttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/InHghttp://en.wikipedia.org/wiki/HPahttp://en.wikipedia.org/wiki/Mbarhttp://en.wikipedia.org/wiki/Km/hhttp://en.wikipedia.org/wiki/Mphhttp://en.wikipedia.org/wiki/2005http://en.wikipedia.org/wiki/August_31http://en.wikipedia.org/wiki/2005http://en.wikipedia.org/wiki/August_23http://en.wikipedia.org/wiki/Image:Hurricane_Katrina_LA_landfall_radar.gif


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Supply Factors

Saudi Arabia Iraq, Iran,Nigeria

OPEC

Venezuela

Choke points

Hurricane season Tanker capacity & Refinery capacity

Strategic reserves of USA, Japan and India.

COTTON


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COTTON

5 largest PRODUCERS :China , USA , India , Pakistan ,Uzbek.

5 largest EXPORTERS :USA ,Fr Africa ,Uzbek ,Australia,

India.

Rate 1 maund (37/ 32 Kg)


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Rate 1 maund (37/ 32 Kg)= RS.3,250. (Pakistan - KCE).

1 bale of Cotton = 4.05 maunds.

1 Lot = 100 bales.


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Supply Factors :


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Supply Factors :

1.) USA , Pakistan , India, Chinaetc crop. Acreage and Yield.

Pakistans 11.5 mn. bales.

2.) Supply of man-made fiberse.g. Polyester, Acrilyc.

PALM OIL


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Rate: $ 666 per ton.

Demand Factors:

1.Global demand for food.

2. Global demand for energy.Used for edible oil, bio-diesel etc.

Supply Factors:


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Supply Factors:1.) Malaysia is a major producer. 16mn tons. Requires lots of land.

2.) Soya oil is a close substitute(Brazil).

Palm oil falls as Ringgit gains.

Just as Crude oil falls with $ gaining

IRON ORE


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The main raw material to produce steel isiron ore.

Steel represents 95% of the metal that is

used every year.

Iron ore prices filter down into steel prices

and into the prices of cars, scooters, washingmachines, refrigerators etc.

Iron ore price critical to global inflation.


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Typically Gold moves in line with


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yp yCrude Oil andCrude Oil moves

opposite $.

In the short-term Gold prices will be

linked to Crude Oil and the $.

CAPITAL MARKETS


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CAPITAL MARKETS

DOW JONES (DJIA) USA

NASDAQ USA S&P

USA FTSE UK

CAC France

DAX Germany

NIKKEI JapanKSE Pakistan

BSE India

CAPITAL MARKET includes


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CAPITAL MARKET includes

institutions that channelizesupply & demand for long termcapital e.g. Stock Exchange,

Banks, Insurance cos.

CAPITAL MARKET for longterm capital versusMONEYMARKET for short term

STOCK EXCHANGE. A market in


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which shares are bought and sold.They facilitate saving and investment.

Primary markets e.g. IPO,s versusSecondary markets.

BOND MARKET. Locally TFCs.

KSE market cap.$70 bn.Bombay $1 tr.

Joseph Stiglitz


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p g

The stock market does not alwaysreflect the broader economic reality

Economic science has shown that it

is virtually impossible systematicallyto make money by beating themarket

DOW JONES. An index of industrial


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US stocks.

S&P 500. A more broad-based index.

NASDAQ. A technology heavy index.Experts believe the US financialmarkets cannot bottom out until thedrop in home prices slows down. Thisis the worst post-war housing

recession

Bubble Asset prices unrelated to


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underlying values.

Bubbles are based on a certainirrational exuberance.

Bubbles can appear in any marketanywhere in the world.

KSE 100 index .


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May 98 - 800

Jan 04 - 4800

Mar 05 -10,300

Apr 07 -12,000

Market Capitalization.


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p

Nov 2002. Rs. 525 bn

Sep 2003. Rs. 1 tr

Feb. 2004 Rs. 1.2 trJune.2005 Rs. 2 tr.

. Sept 2007 Rs. 4.2 tr.


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Volume Leaders Eg. BOP, LUCKYCEMENT, HUBCO, MCB

Technical action of the stock versusFundamental action.

Mutual Funds. To reduce risk.

SECP is the govt. watchdog.


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Protect investors.

Trust is the cornerstone of thecapital markets. Eg in USA , DJIAfell twice as much at the time of

financial scandals of 2003 than it didon 9/11.


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Is there a relationship between GDP

growth and returns in the stock market?

COMMODITIES MARKETS ,CURRENCY MARKETS CAPITAL


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CURRENCY MARKETS ,CAPITAL

MARKETS and other marketsareconstantly reacting withinthemselves & with each other e.g.

1.) Palm oil and Soya oil ,assubstitutes ( within commoditiesmarkets )

2.) Crude oil and palm oil .When


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crude goes above $70,bio-diesel

story begins. ( within commoditiesmarkets)

3.) Yen-carry trade .Yen , NZ$ , NZ

stock market, Shanghai stock mkt.(currencies markets and capitalmarkets )

4.) Crude Oil and US$. (commoditiesk t & k t )


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markets & currency markets)

5.) US $ and Gold. Inverse

relationship. Both safe havens.(currency markets and commoditymarkets.)

6.) Sub-prime mortgage crisis inth USA ill i f


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the USA will cause repossession of

record number of homes and aslump in the real estate market .Thiscould put a brake on US economicgrowth. Downward pressure on theUS $. ( Real estate market and

currencies).


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INTERNATIONAL TRADE

&

W.T.O.

DEFINITIONS


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INTERNATIONAL TRADE. Measuredby the volume of imports & exports

which has grown 17 times between1950 & 2000 when output(GDP)increased only 6 times.

EXPORTS. Sales abroad.


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IMPORTS. Purchase of foreigngoods and services.

GDP can be calculated by adding the total valueof acountrys annual OUTPUT of goods & services.


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GDP. = C + G + I + ( X - M ) .

Consumption

Government

spending

Exports

Business

Investment

Imports.(Consumer)

There are a few cases of rapidd l i d hi h


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development in modern history that

have not relied on exports as anengine of growth. ie. GDP growth.

2008 world trade to grow at 8%

while global GDP at4.5%.

PROTECTIONISM. To protect ai f f i


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countries economy from foreign

competition.

FREE TRADE is the opposite ofProtectionism.

TARIFF. Tax on goods producedabroad E g Custom duty by CBR


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abroad. E.g. Custom duty by CBR.

SUBSIDY. Money paid by governmentto keep prices below what they would

be in a free market. A form ofprotectionism.

QUOTA. A limit on the number ofgoods that can be imported . Alsoprotectionism

W.T.O. Promotes trade by loweringof tariffs subsidies and quotas Sets


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of tariffs, subsidies and quotas. Sets

and enforces the rules ofinternational trade.

Formed 1995. H.Q. Geneva.Membership of 153 countries.

Pakistan is a member of the WTO.(automatically because of GATT )

Current issues facing WTO:


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1.Trading in farm products whichis the agenda of the under-developed countries.

2. Trading in services & industrialproducts is the agenda of the

developed countries.

NON-TARIFF BARRIERS. Eg. Pakcement export to India Opposed by


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cement export to India. Opposed by

WTO.

DUMPING. Selling goods in exportmarket for less then the cost ofproducing it. Opposed by WTO.

ANTI-DUMPING DUTY. As per WTO.Imposed by NTC in Pakistan

FREE TRADE AGREEMENT. Eg.between Pakistan and Sri Lanka


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between Pakistan and Sri Lanka.

FREE TRADE AREA. E.g. ASEAN,

EU , NAFTA, GCC, etc.


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SAFTA. In initial stages. Ratified byb i i


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member countries in 2006.

Developing countries ie. India,

Pakistan and Sri Lanka to reachzero duty regime by 2012. LCDslike Nepal, BDesh, by 2015.

Even without SAFTA for PakistanIndia a market of over 1.1 bn.

A LOOK AT PAKISTANS EXPORTS!

A i f GDP


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An important component of our GDP& the most important contributor toour FOREX RESERVES.

Pakistans EXPORTS are $19.22 bn.in 07-08.

If Pakistan hopes to sustain 7%+GDP growth rate we must have 14%growth rate in exports.

PAKISTAN EXPORTS- COUNTRY WISE BREAK-UP.


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Country Exports

FY20061. U.S.A

2. UAE

3. UK

4. Hong Kong

5. Afghanistan

6. Germany

7. Italy

8. China

9. Spain

10. France

TOTAL

$ 3.69bn

$ 1.3bn

$ 899m

$ 719

$ 831m

$ 682m

$ 521m

$ 412m

$ 379m

$ 365m

$9.80 bn.

Exports to China negligible . A hugemarket for citrus fruits ($0 5 bn )


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market for citrus fruits ($0.5 bn.),

processed foods and processedherbal medicines.Chinas Imports will grow!!

Lack of geographical

diversification.

PAKISTANS EXPORTS- PRODUCT WISE BREAK-UP.

1. Textiles. 62.00 %


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2. Agro Products. 10.30 %

3. Leather 7.40 %

4. Chemical & Pharma. 4.00 %

5. Sports Goods. 2.70 %

6. Carpets & Rugs 2.50 %

7. Surgical Instruments. 1.60 %

8. Engineering goods 1.60 %

9. Other. 7.90 %

TOTAL 100 00 %

WORLD BANKS CLASSIFICATION OF EXPORTS

CATEGORY PAKISTAN PRODUTSWORLD


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CATEGORY.

1)RESOURCE

BASED

2) AGRICULTRE

3)LOW TECH

MANUFACTURES

4)MEDIUM TECH

MANUFACTURES

5)HIGH TECH

MANUFACTURES

PAKISTAN PRODUTS.

COPPER, etc.

RAW COTTON,

WHEAT,SUGAR,FRUITS.

TEXTILES,CARPETS, SPORTS

LEATHER, SURGICAL

AUTOMOBILES, AUTOPARTS

PHARMA, CHEMICALSBIO-TECH, HI-TECH

SOFTWARE& ELECTRONICS

%

5

12

77

3

3

GROWTHRATE

N.A

N.A

10%

20%

20%

TEXTILE SECTOR ANALYSIS (MICHAEL PORTER)

1RAW COTTON. COMMODITY - COST LEADERSHIP

2 GINNED COTTON // //


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2 GINNED COTTON . // //

3 YARN . // //

4 FABRIC. // //

5 PROCESSING. // //

6 GARMENTS. NON-COMMODITY - DIFFERETIATION

STRATERGY

Most of our exports in category 1-5. Unlike BDesh.

Commodities.Low value added. Require economies of scale to

bring down per unit cost .Difficult todifferentiateand brand.

World Banks advice climb up theladder from low-tech manufactures to


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ladder from low tech manufactures to

medium and hi-tech, to increase itsshare of world trade.

Auto-parts (med-tech) Philippines $800 mn. India $600 mn. Pakistan $10mn.(03)


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Pakistan only 2% of world textileexports. Competitive Advantage ?

Textiles trade now called Rag trade.Only 5% global growth.

Lack of product diversification.

COUNTRY POP

(In mn.)

FOREXRESEVESEXPORT

In bn


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PAKISTAN

INDIA

B,DESH

THAILAND

MALAYSIA

SINGAPORE

JAPAN

CHINA

U.S.A

HONGKONG

164

1125

150

60

26

4

127

1,317

301

7

$ 11

$ 256

$

$

$ 87

$

$ 1,000

$1,953

$ 69

$ 135

$19

$175

$14

$ 178

$195

$283

$776

$1,465

$1,377

$362

2009

Diversity of exports in S.E. Asia( geographic & products ) where


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( geographic & products ) where

export growth has been 20 % +.

THAILAND- cars (med-tech

manufactures) & rice (agricultural) TOrich countries like Japan &USA andpoor countries like Laos.

Why has Pakistan lagged behind ?


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1.)Exports was never a central pillarof our development strategy.

2.) Domestic markets after 1947were heavily protected. Exportswere not as profitable.

PAKISTANS IMPORTS


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CRUDE OIL (includes oil & products)

PALM OIL.

TOTAL IMPORTS = $ 39.96 bn.

Pakistans developing scenario


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Pak Rupee depreciates to Rs.80 / $.(Reason, Pakistan's falling Foreign

Exchange Reserves.)

Pakistan's Foreign Exchange

Reserves fall to $ 11 billion. (Reason,crude oil rose to $ 147 / barrel. Our oil

imports are 23% of our imports.)

Crude Oil rose up to $147 / barrel.(Reason, $ falling against the Euro)


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Crude Oil falls to $60 / barrel

(Reason, $ rising. US & Global

economy slowing.)

US economy slowdown. (Reason,

falling housing market caused by thesub-prime mortgage crisis)

Federal Reserve lowers interest rates.

( Reason slowdown in US economy)


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( Reason, slowdown in US economy)

.. ? ?

Question. So when and how will the

Pak Rupee begin to recover ? What arethe possible scenarios ?

THANK YOU !!!


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THANK YOU !!!

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Economic Affairs by Bilal Ilahi

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