There’s still no sign of the market support fund that Finance Adviser Dr Hafeez Shaikh announced during a stakeholders’ meeting at the Pakistan Stock Exchange (PSX) on May 17.

Brokers and investors had their reasons to ask for government intervention that could halt the market fall. The meltdown continued that day as the benchmark index had tanked to a three-year low of 33,971 points. The descent began from the peak of 52,800 points exactly two years ago when the PSX was upgraded to the status of the MSCI Emerging Market from the MSCI Frontier Market.

There is a precedent for the market support fund. The government set up a support fund during the stock market crash of 2008. It was financed by government-owned major entities and managed by National Investment Trust (NIT). It provided the fast-falling market with stability.

Believing that the lightning might strike in the same place twice, the finance adviser ordered that the fund be set up on a fast-track basis.

Some of the lending parties are unhappy about the reported replacement of sovereign guarantees with letters of comfort

The Economic Coordination Committee (ECC) approved the proposal of the Finance Division, authorising the government to issue a sovereign guarantee amounting to Rs20 billion to the financiers (lenders of loan) i.e. National Bank of Pakistan (NBP), State Life Insurance, Employees’ Old-Age Benefits Institution and National Insurance Company.

In order to ensure the quick establishment of the fund, the ECC skipped many Prudential Banking Regulations of the State Bank of Pakistan (SBP). Most people expected that the fund would be launched before the end of May. But all of a sudden a deafening silence replaced all the song and dance. Has the government changed its mind and put the idea to bed?

Surprisingly, brokers who clamoured for the fund are tight-lipped.It was proposed that two funds would be set up: State Enterprise Fund (SEF) of Rs20bn and Equity Market Opportunity Fund (EMOF) of Rs5-10bn. It was along the lines of the 2008-09 support fund.

Managed by NIT, it was supposed to create stability by investing in the shares of eight government-owned enterprises listed on the stock exchange: Oil and Gas Development Company (OGDC), Pakistan State Oil (PSO), Pakistan Petroleum Ltd (PPL), Sui Southern Gas Company (SSGC), Sui Northern Gas Pipelines Ltd (SNGPL), Pakistan Telecommunications Ltd (PTCL), NBP and Kot Addu Power Company (Kapco).

Rumours about the fate of the fund abound. A reliable source in the thick of the matter told this writer that the process has slowed down after the International Monetary Fund (IMF) loan was finalised. “One of the conditions imposed by the IMF was to put a limit on sovereign guarantees,” he said.

In order to clear the hurdle, NIT was in the process of securing letters of comfort (LoC) for the financing institutions. But some of the lending parties were unhappy about the replacement of sovereign guarantees with LoC — the former means that in the case of a loss, the government will be bound to compensate the lending institutions.

There were other less-convincing arguments. A corporate lawyer opined that the legal angle was not altogether lost on the government. There was always the risk of an investor or a group of investors of any other company taking the battle to court. They could object that if public money was to be used to support the falling stock prices, then why only eight government-owned institutions should receive it. In other words, they could seek a bailout for other entities in which they held big stakes.

Many market gurus are unconvinced that the SEF, even if it materialises, will make much of a difference. “The PSX is valued at Rs7 trillion. The sum of Rs20bn will be a drop in the ocean,” said a fund manager.

He believed that it could add up to 6,000 points to the index at the most. But another market player disagreed with this view, saying that the SEF would offer psychological support to investor sentiments. “It’ll provide confidence to investors. If the market was to go into free fall, the fund would step in to buy and stabilise it.” The investment sense of the management company would be of great essence. The 2008-09 fund was ably managed by the then chairman of NIT, Tariq Iqbal Khan.

Overall, investors appear to have little faith in the support fund. They don’t expect it will help recover the losses suffered by the bourse in the last three years. Although the target companies are known, there does not appear to be any anticipatory buying. Stock prices of most of these eight companies did not change much between May 17 and July 4.

Prices of OGDC, PTCL, NBP and Kapco stocks have stayed unchanged during the period. The stock price of PSO increased from Rs152 to Rs170, SNGPL from Rs55 to Rs71 and SSGC from Rs15 to Rs21. There could be a number of reasons for the increase in their stock prices. Meanwhile, the stock price of PPL dipped to Rs147 from Rs166 on May 17.

Published in Dawn, The Business and Finance Weekly, July 8th, 2019