1. Pakistan Capital Markets and the IMF - Friend or Foe? Adnan Afridi Managing Director Karachi Stock Exchange 1

2. The Pakistan Economy 2 Elections meant that key economic decisions were not made Commodity prices hit all time high –Oil reached $147 per barrel Rupee under pressure Investor confidence declined Capital flight – foreign exchange reserves declined Foreign Investment Outflow Inflation hit all time high

3. Impact on the Capital Market 3 Exchange was forced to act and impose floor on Aug 27 prices to provide a cooling down period to the market 2008 average daily volumes were around 50% below average daily volumes of 2007 2008 average daily values were also around 50% below average daily values of 2007 Source: KSE Research

4. The KSE 100 Index was one of the worst performing markets of 2008 Source: KSE Analysis COUNTRYINDEXJan 1 2008 – Dec 31, 2008 (Local currency) UKFTSE 100-31.3% Kuala LumpurKLSE Composite-39.3% USNasdaq Comp.-40.5% SeoulComposite-40.7% TokyoNikkei 225-42.1% TaiwanT. Weighted-46.0% BangkokSet-47.6% Hong KongHang Seng-48.3% SingaporeStrait Times-49.4% JakartaComposite-50.6% BombaySensex-52.4% KSE100 Index-58.3% ChinaShanghai Comp.-65.4% Source: KSE Research

5. Key Reasons for Market Decline 5 May ‘ 08August’08 Exchange Rate US$1 Rs. 66.25Rs. 75.81 Reserves at SBP US$ 11.9 billionUS$ 5.76 billion Inflation 19.3%25.3% Foreign Investor Portfolio Investment Jan – May 08 US $115 million (outflow) Jan – August 08 US$ 332 million (outflow) Oil Prices US$ 111.91US$ 118.15 (reached US$ 147 in May- June) Interest rates registered a 500 basis point increase in 2008 Fear amongst investors of policy changes that could impact viability of listed companies (media speculation has contributed to these fears). Last year of previous government, care-taker government and transition period of current government has meant a 18 month period where key decisions with respect to economy were not taken (e.g. removal of subsidies, reduction in govt. borrowing, etc.) Source: KSE Research

6. Enter the IMF 6

7. Key Features of IMF Program Homegrown package Pakistan received a US$ 7.7 billion loan from the IMF on November 24, 2008 Pakistani Government and Finance Officials in consultation with IMF set the main parameters and criteria on which performance would be assessed. –Real GDP growth of 2.5% for 2008-09 and 4% in 2009-10 –Annual average CPI of 20% in 2008-09 and 6% in 2009-10 –Current Account deficit of 6% of GDP in 2008-09 and 4.5% in 2009-10 –Authorities to adopt a tax policy and tax administration plan –Elimination of tariff differential subsidies by end June 2009 –SBP to prepare contingency plan on how to deal with problem banks –Provision of Foreign Exchange by SBP for imports of furnace oil to be ceased 7 Source: KSE Research, IMF Country Report No. 09/123 April 2009

8. The Day After… 8

9. Key Indicators have started to rebound Pre IMF Program Post IMF Program Current Trend Credit default Spread on Sovereign Debt 5000bps1700bps Exchange Rate US$1 Rs.60 <US$ 1<Rs. 79Rs. 80-81Stable Reserves at SBP US$ 3.5 billionUS$ 7.1 billion Inflation 25.3 % (Aug 08)17.2% (Apr 09) Discount Rate 15%14% Foreign Investor Portfolio Investment Jan- Mar 2009 US$ 238 million (outflow) April – May 2009 US$ 37 million (outflow) Stable 9 Source: KSE Research

10. KSE 100 Index has made a recovery from the 5000 point level to close above 7100 points on May 26, 2009 10 Domestic and Global Investor Confidence has been improving Oil prices have fallen to US$ 50 per barrel from the US$ 147 mark Food prices have also registered a steep decline Liquidity has begun to flow back into the market – average daily volumes for 2009 are 182 million KSE Market Capitalization has increased by Rs. 269 billion since January 1, 2009 Source: KSE Research

11. The Market has rebounded in 2009 COUNTRYINDEXJan 1 2009 – May 26, 2009 Taiwan T. Weighted45.56% China Shanghai Comp.42.17% Bombay Sensex40.94% Jakarta Composite37.05% Singapore Strait Times27.09% KSE 100 Index22.37% Seoul Composite22.02% Bangkok Set20.61% Kuala Lumpur KLSE Composite19.95% Hong kong Hang Seng18.10% US Nasdaq Comp.7.29% Tokyo Nikkei 2255.09% UK FTSE 1002.45% Source: KSE Research

12. Opportunities and Challenges that the IMF Program presents to Pakistan Challenges Opportunities Lower Growth/Lower companies dividend Equity more attractive than debt (could boost listings) Tight monetary policy – could lead to company defaults Macro economic stability attracts global portfolio investment Consumer to put up with a reduction in subsidies; could create social instability Government removal of subsidies to create fiscal balance (focus on development spending can spur growth) Lower spendingReduction in government borrowing to lower inflation (all asset classes to benefit from lower inflation) 12

13. The following are in process: Demutualization of the Exchange – publically listed with strategic investor Promotion of Derivative Products New Services (Data Vending) Debt Market Trading Platform Investors education programs (road shows, seminars & online training) Future Plans of KSE

14. Pakistan’s story: A Resilient Nation, A Resilient Economy Pakistan’s economic and political development GDP Growth has averaged over 5% since 1951 on the back of fundamental growth drivers Source: BMA Research 14