Oil on troubled waters

IN OCTOBER 1987 the landmark privatisation of British Petroleum (now BP) was derailed by “Black Monday”, a big stockmarket crash. Pakistan’s planned divestment of a 7.5% stake in OGDCL, a listed but largely state-owned oil firm, has not been quite as cursed, but the circumstances could be more propitious. Pakistan’s government has been on the back foot following street protests in August and September. A nuisance suit to stop the sale was quashed this week by the Supreme Court. But there is likely to be a further delay while OGDCL publishes its results. Meanwhile the oil price has fallen sharply, as have stockmarkets around the world.

The good news for Pakistan’s government is that the appetite for local assets has been strong. Since the start of 2012 MSCI’s index of Pakistani shares has risen by 60% in dollar terms—ahead of global indices as well as Pakistan’s peers among frontier markets, which are less liquid and less open to foreign capital than others (see chart). The surprise is that the market did not fall further over the torrid summer. That was thanks largely to foreigners, who kept piling in even as jittery locals began selling. They bought a net $36m-worth of shares in August, when the protests were at their height, and a further $53m-worth in September.

The market’s bull run began in 2012 when a tax amnesty allowed previously hidden cash to be invested in stocks. Foreigners’ interest was piqued after elections in May of last year which led to the country’s first ever handover from one civilian government to another. The new one was seen as friendlier to business and took advice and credit from the IMF. Reforms were drafted and privatisations scheduled. A $2 billion bond issue this April was many times oversubscribed.

This was encouraging for a country more often seen as a cauldron of instability than as a fount of opportunity. Pakistan remains at the wrong end of international rankings of corruption, human development and security. But it is almost mid-table in the World Bank’s international comparison of the “ease of doing business”, scoring higher than either Brazil or India. Pakistan’s listed firms have a handsome average return on equity of more than 25%. The market is cheap relative to its frontier-market peers, with shares priced at 8.5 times earnings on average.

Pakistan’s market also spans lots of industries with a variety of well-run firms in each, says Andrew Brudenell, who runs a $700m frontier fund for HSBC which has a tilt towards Pakistan. Such diversity is in part a product of successive governments’ habit of privatisation by fits and starts: no fewer than 169 chunks of state-owned firms have been offloaded since 1991. The two most recent sales, in June, were of a 5% stake in Pakistan Petroleum, another oil firm, and of the state’s 20% shareholding in United Bank.

The more shares that float freely, the bigger the weighting Pakistan earns in the stockmarket indices that act as industry benchmarks. It is already the fourth-biggest frontier market, following the promotion of United Arab Emirates and Qatar to MSCI’s emerging-market index in June. This may explain the continued buying of its stocks during the turbulent summer. The sale of the stake in OGDCL is thus pivotal. It will not only give the stockmarket greater depth, but also add to Pakistan’s depleted currency reserves if, as expected, foreigners are the main buyers. The seven further privatisations in the pipeline should bring similar benefits. None of them is an oil company.