Security Analysis & Valuation

ECONOMIC ANALYSIS

Dewan Cement Ltd.

Submitted To:
Syed Babar Ali

Submitted BY:
Fahad Hassan (09-2676)

Economy:
Economy overview:
Decades of internal political disputes and low levels of foreign investment have led to slow growth and underdevelopment in Pakistan. Agriculture accounts for more than one-fifth of output and two-fifths of employment. Textiles account for most of Pakistan's export earnings, and Pakistan's failure to expand a viable export base for other manufactures has left the country vulnerable to shifts in world demand. Official unemployment is 6%, but this fails to capture the true picture, because much of the economy is informal and underemployment remains high. Over the past few years, low growth and high inflation, led by a spurt in food prices, have increased the amount of poverty - the UN Human Development Report estimated poverty in 2011 at almost 50% of the population. Inflation has worsened the situation, climbing from 7.7% in 2007 to more than 13% for 2011, before declining to 9.3% at year-end. As a result of political and economic instability, the Pakistani rupee has depreciated more than 40% since 2007. The government agreed to an International Monetary Fund Standby Arrangement in November 2008 in response to a balance of payments crisis. Although the economy has stabilized since the crisis, it has failed to recover. Foreign investment has not returned, due to investor concerns related to governance, energy, security, and a slowdown in the global economy. Remittances from overseas workers, averaging about $1 billion a month since March 2011, remain a bright spot for Pakistan. However, after a small current account surplus in fiscal year 2011 (July 2010/June 2011), Pakistan's current account turned to deficit in the second half of 2011, spurred by higher prices for imported oil and lower prices for exported cotton. Pakistan remains stuck in a lowincome, low-growth trap, with growth averaging 2.9% per year from 2008 to 2011. Pakistan must address long standing issues related to government revenues and energy production in order to spur the amount of economic growth that will be necessary to employ its growing population. Other long term challenges include expanding investment in education and healthcare, and reducing dependence on foreign donors.

GDP:
The Gross Domestic Product (GDP) in Pakistan expanded 3.67 percent in 2012 from the previous year. GDP Growth Rate in Pakistan is reported by the Pakistan Bureau of Statistics. Historically, from 1952 until 2012, Pakistan GDP Growth Rate averaged 5.0 Percent reaching an all time high of 10.2 Percent in June of 1954 and a record low of 1.8 Percent in June of 1952. Pakistan is one of the poorest and least developed

countries in Asia. Pakistan has a growing semi-industrialized economy that relies on manufacturing, agriculture and remittances. Although since 2005 the GDP has been growing an average 5 percent a year, it is not enough to keep up with fast population growth. To make things even worst, political instability, widespread corruption and lack of law enforcement hamper private investment and foreign aid. This graph includes a chart with historical data for Pakistan GDP Growth Rate.

Unemployment rate:
Unemployment Rate in Pakistan decreased to 5.70 percent in the second quarter of 2011 from 6.10 percent in the first quarter of 2011. Unemployment Rate in Pakistan is reported by the Pakistan Bureau of Statistics. Historically, from 1985 until 2011, Pakistan Unemployment Rate averaged 5.3 Percent reaching an all time high of 7.8 Percent in June of 2002 and a record low of 3.1 Percent in December of 1987. In Pakistan, the unemployment rate measures the number of people actively looking for a job as a percentage of the labor force.

Inflation rate:
The inflation rate in Pakistan was recorded at 8.10 percent in January of 2013. Inflation Rate in Pakistan is reported by the Pakistan Bureau of Statistics. Historically, from 1957 until 2013, Pakistan Inflation Rate averaged 8.04 Percent reaching an all time high of 37.81 Percent in December of 1973 and a record low of -10.32 Percent in February of 1959. In Pakistan, most important categories in the consumer price index are food and non-alcoholic beverages (35 percent of total weight); housing, water, electricity, gas and fuels (29 percent); clothing and footwear (8 percent) and transport (7 percent). The index also includes furnishings and household equipment (4 percent), education (4 percent), communication (3 percent) and health (2 percent). The remaining 8 percent is composed by: recreation and culture, restaurants and hotels, alcoholic beverages and tobacco and other goods and services. This graph includes a chart with historical data for Pakistan Inflation Rate.

Fiscal Policy:
The Fiscal Policy Statement 2012-13 released has expressed its dissatisfaction over the tax generation efforts by provinces and assessed that provinces tax effort are not in line with the understanding reached during the National Finance Commission (NFC) Award. According to the Fiscal Policy Statement 2012-13 by the Debt Policy Coordination Office of the Ministry of Finance, despite transferring the functions of 17 ministries to provinces, federal expenditure did not fall as most of the employees of the devolved ministries preferred to stay on the federal payroll rather than opting for the provinces, some new ministries were created in the federal government, and some divisions were upgraded to ministries.

Money Supply:
The central bank figures show the money supply declining by 2.40 percent to Rs183 billion during four weeks of FY13 compared to a decline of 1.98 percent to Rs132 billion during the same period last year.

Foreign Direct Investment:

The Foreign direct investment; net (Bop; US dollar) in Pakistan was last reported at 1971000000 in 2010, according to a World Bank report published in 2012. Foreign direct investment is net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other longterm capital, and short-term capital as shown in the balance of payments. This series shows total net, that is, net FDI in the reporting economy from foreign sources less net FDI by the reporting economy to the rest of the world. Data are in current U.S. dollars. This chart includes a historical data chart, news and forecasts for Foreign direct investment; net (BoP; US dollar) in Pakistan.

Portfolio Management:
The Portfolio investment; bonds (PPG + PNG) (NFL; US dollar) in Pakistan was last reported at -1200000000 in 2010, according to a World Bank report published in 2012. Bonds are securities issued with a fixed rate of interest for a period of more than one year. They include net flows through cross-border public and publicly guaranteed and private nonguaranteed bond issues. Data are in current U.S. dollars. This chart includes a historical data chart, news and forecasts for Portfolio investment; bonds (PPG + PNG) (NFL; US dollar) in Pakistan.

Suggestion:
Huge government borrowing from the banking system has pushed the growth in the monetary expansion to an alarming level of 5.74 percent during July 1 to December 7, 2012, casting serious concerns over the increased government spending, which ultimately leads to excessive fiscal borrowing and trigger money supply to grow at a faster pace, according to the State Bank of Pakistan (SBP). In spite of the political opposition faced by the incumbent coalition government, Pakistans financial situation has barely improved in the last five years. The measures designed to arrest the economic decline have not yielded any substantial results. The incumbent government has continued to present pro-poor budgets, but has struggled to arrest the galloping inflationary trends and growing joblessness prevalent in the country. The energy crisis faced by Pakistan due to monetary mismanagement continues to thwart economic recovery and keeps on eroding the capacity of the existing economic institutions and units. The crisis of trust in Pakistans economy remains the most threatening element of the countrys financial woes. This is reflected in a tax base that continues to default on its dues to the state and in the trend of downward-spiraling values for the local and foreign investment in the Pakistani economy.