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The Fallacy of Market Support Fund

02:52 PM | 31 May, 2019
The Fallacy of Market Support Fund
The KSE-100 Index reached a peak of 52,876 points in May 2017, and has been on a south-bound trend since then, declining by more than 16,917 points over the last 24 months. As the benchmark index continued to lose value, there was increasing noise in the market about intervention by the Government, through State Owned Entities, to support the market in this time of crisis. As the noise amplified, and as major market participants cozied up to the Government, a support fund was engineered, to support the market in times of a crisis.

But is this really a crisis? Maximum drawdown or the maximum loss from peak has been around 37 percent, spread over a period of two years. The last time a support fund was organized, the maximum drawdown was 69 percent within a span of 9 months, and the market was suspended for a few months, thereby severely depressing prices of securities across the board. Furthermore, the Global Financial Crisis and prevalence of Badla financing further accelerated a downward spiral. At that point in time, state institutions pitched in to provide a sense of comfort, and confidence to the market by acting as a buyer of last resort. Currently, there are no such issues. There is no market suspension, and neither are prices in a free fall. At one point or the other, some buyer jumps in whenever the value is there.

In a scenario when interest rates start increasing, as a contractionary monetary policy starts coming into play, investors take an economic decision to switch towards low-risk fixed income securities, rather than assuming significant risk associated with equity investments. A 10-yr Bond (PIB) issued by the Government of Pakistan has a yield of13.48 percent for 10 years. Similarly, Defence Savings Certificates offer a rate of 12.47 percent, with a maturity period of 10 years. When practically risk-free instruments are providing such high yields, it just makes economic sense for investors to switch to these high yielding fixed income instruments, rather than bearing risk in the market. A high interest rate environment further disincentivizes any investment in the stock market.

In such a scenario, why should State Owned Entities, which often have precarious financial position be pushed to make investments support the equity market, such that vested interests of a few big market participants can be protected. Why should the State provide a sovereign guarantee to hedge risky activity of such market participants?

Investment in stock market is a high-risk proposition, and that comes with its own set of rewards, and potential losses.  A market support fund tampers with free functioning of the market, rigging it in the process, thereby not allowing the market to reach an equilibrium, as a chosen few make hay.

A taxpayer should not be bailing out risky activities of market participants.  Such an action sets a bad precedence, acting like a plague, making existing participants complacent in managing their risks, and exposures – because they know, that the State will step in to bail them out.  It is no surprise that vibrancy of the market has actually reduced over the years, with lower volumes, sparse fresh listings, a stagnant investor base, and a restricted product suite.

A market support fund is by the rich, and for the rich, who already wield necessary insider information to mop up gains, which taints market integrity – crucial component for growth, and sustenance of capital markets. Instead of providing a bail out, the State should take measures to increase the investor base, in order to make the capital markets more vibrant – and that can only be done if market integrity is there, and oligopolistic behavior of major market participants is eliminated to foster competition in the market. As long as special interest groups continue to drive policy which favors myopic self interests, rather than interests of capital markets at large – we will continue to have a lackluster market looking for the next bailout when times go bad.

Ammar Habib Khan has a Masters in Macroeconomic Policy, he is a Risk Manager & Energy Economist by Profession

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Currency Rates in Pakistan - Pakistani rupee exchange rate against US dollar, Euro, Pound and Riyal - 24 Feb 2024

Pakistani currency remains largely stable against US dollar and other currencies in the open market on February 24, 2024.

US Dollar rate in Pakistan

In the open market, the US dollar was being quoted at 279.5 for buying and 282.55 for selling.

On Saturday, Euro stands at 302  for buying and 305 for selling while British Pound rate stands at 352.5 for buying, and 356 for selling.

UAE Dirham AED hovers at 76.1 whereas the Saudi Riyal saw slight increase, with new rates at 74.35.

Today’s currency exchange rates in Pakistan - 24 February 2024

Source: Forex Association of Pakistan. (last update 09:00 AM)
Currency Symbol Buying Selling
US Dollar USD 279.5 282.55
Euro EUR 302 305
UK Pound Sterling GBP 352.5 356
U.A.E Dirham AED 76.1 76.8
Saudi Riyal SAR 74.35 75.1
Australian Dollar AUD 181 183
Bahrain Dinar BHD 743.88 751.88
Canadian Dollar CAD 207 209
China Yuan CNY 38.89 39.29
Danish Krone DKK 40.38 40.78
Hong Kong Dollar HKD 35.76 36.11
Indian Rupee INR 3.37 3.48
Japanese Yen JPY 2.10 2.18
Kuwaiti Dinar KWD 908.79 917.79
Malaysian Ringgit MYR 58.6 59.2
New Zealand Dollar NZD 171.68 173.68
Norwegians Krone NOK 26.43 26.73
Omani Riyal OMR 726.53 734.53
Qatari Riyal QAR 76.76 77.46
Singapore Dollar SGD 207 209
Swedish Korona SEK 26.53 26.83
Swiss Franc CHF 317.87 320.37
Thai Bhat THB 7.79 7.94

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