Road shows - check. Book building – check. Political turmoil – check. Slump in oil price – check. The last two ticks had the final say in the OGDCL share divestment plans, which have now been shelved, at least for the time being.
Analysts and market observers were keenly awaiting the news related to OGDCL last Saturday – and it did come, but that of government’s postponement of the share divestment, instead of the one being anticipated of the final strike price achieved through book building.
And it did come as a surprise despite falling global crude oil prices. Largely because there were no signs from the government side, even 24 hours prior to the back off, when they were busy explaining that the proposed sell-off is not privatization. Few pundits had anticipated when the sit-ins were in full swing that the target seems too ambitious, and the government would either have to reduce that or call off the plan. To everyone’s surprise, the government did both.
Why did this happen, have a simple answer on the face of it. The government thinks and rightly so, that oil prices have declined too steep to make the transaction a meaningful one for Pakistan.
BR Research spoke to Muhammad Zubair, Chairman Privatization Commission soon after the development and his views echoed those in the Finance Ministry’s press release issued shortly after.
Zubair was of the view that the floor price of Rs216/share was already set very low and the sharp slump in oil price has eroded the share price significantly. “It would not make economic sense for us to go ahead, when the prices are low, and the demand is not there either,” he told BR Research over the phone.
It may well be a good thing in the hindsight to not sell off the government’s stake at cheap rates, something that will probably also get the nod from opposition benches. Be that as it may, the whole episode simply does not put Pakistan in a bright spot in terms of its image with global capital markets and leading investors. Too early to say, how sizeable will that image dent be, but that there would definitely be one, should be beyond doubt.
The Privatization Commission can be pardoned on not anticipating the sharp decline in oil prices. Yes, the call was for oil prices to be weak, but even the EIA in its energy outlook back in May had anticipated crude oil to weaken by not more than 4-5 percent. So it actually did come as a surprise.
From what it appears, the market response during book building was far from expectations, hence the government’s decision. Otherwise, prices had already fallen significantly by last week, to make a weak case. Zubair’s words also hint that the demand was not there up to the mark, both in the domestic and international market.
The cabinet committee has taken the opportunity to tell one and all that the calling off proves that OGDC divestment was not being carried under the IMF instructions. That may well be the case. But that it would irk the fund should not be doubted. The government has budgeted Rs198 billion in privatization proceed in the budget 2014-15, which would now remain an elusive dream, unless HBL and ABL GDR offerings materialize.
One wonders if the government has seen further political turmoil coming, as PPP had hinted at launching a campaign against the privatization drive. And if oil price was the key driver behind it, read EIA’s short-term energy outlook, which sees international crude oil weakening to new lows in six months. The trade gap would be much less.
Government happens to have killed two birds with one stone by scrapping the OGDC transaction. They have saved the embarrassment from poor response and also diluted the PPP opposition to the transaction.
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