The $46 billion China-Pakistan Economic Corridor (CPEC) is being eyed as a potential "game changer" for the country's booming stocks market which's 0.2 percent simulated weight in the MSCI Emerging Market (MSCI-EM) index, regulators believe, is very small thus challenging. With Pakistan Stock Exchange (PSX) having been re-categorised as emerging market by the global index provider, the front regulators at PSX appear to have taken Wednesday's upgrade, with less than 0.2 percent weight, as a real challenge than opportunity.
"MSCI upgrade is like a foot in the door," Managing Director PSX Nadeem Naqvi told Business Recorder. The growth-conscious government, he said, would have to increase Pakistan's weight in MSCI-EM index through adding at least $30 billion to PSX's market capital. Also, he said, the current average $110 million daily traded value should be enhanced to $500 million in the next few years.
"I think, our $71 billion (Rs 7.3 trillion) market capital should grow beyond $100 billion," the MD said. This, Naqvi said, would happen when the government list mega infrastructure projects under the multibillion dollars CPEC, speed up the divestment of its shareholdings in loss-making State-Owned Enterprises (SOEs) as well as the introduction of derivative products on the stocks market.
CPEC, he said, appeared to be the attractive choice for investors as the private sector was no huge finances to offer. If big LNG and coal-based energy projects were awaiting commissioning, he said, the power distribution companies could be listed for now. Asked how to list CPEC projects, the managing director said to raise infrastructure financing for the debt part the government could issue and list long-term Islamic Sukuk. "It should be on the pattern of substantial private placement with the banks for Neelum-Jehlum power project."
"We also can launch NRP Bonds, Non-Resident Pakistanis bonds which the Emerging Markets lunch world over, like India's NRIs," Naqvi aid. On equity side, he said, the CPEC projects could be turned into companies and listed on the bourse with 10 percent of its shares floated for market investors.
"The government and its Chinese partners would be the sponsors". Further, the projects could also be listed in the form of a joint ventures firm which would be undertaking various projects. Naqvi suggested that the government also could restrict the award of contracts for infrastructure projects of up to $50-100 million to the listed sub-contractors only. "You will have (under CPEC) 60 percent investment going to power generation and 40 percent to real assets, means construction related ventures.
So the government may like to list the construction entities to ensure corporate transparency, documentation of the informal sector and promotion of corporate culture in the country. Once launched, derivative products would make the market more liquid, he said. "Ours is effectively is cash market while derivatives internationally are 5-10 times of the ready market," the PSX official said.
"While congratulations are due all around, this is no time for complacency. Significant challenges lie ahead," he said in his message post MSCI upgrade. In the same message, Chairman PSX Muneer Kamal dubbed CPEC as Islamabad's "most important strategic decision".
"CPEC initiative envisages over $46billion investment over a ten year horizon in major infrastructure projects," he said adding "The capital market will play an important role in sourcing private sector investment in CPEC projects." "I would urge the Government to fully utilise Pakistan capital market for raising finance through infrastructure bonds and equity offerings via listing of CPEC projects on the Pakistan Stock Exchange," said Kamal. Similar calls were made in a recent briefing by Arif Habib, chairman Arif Habib Group, saying the government should incentivize stocks market to be able to offer up to $12 billion of financing for CPEC projects in years ahead.
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