Research Paper

Back to Research Papers

The players of global capital market, in the recent past, have identified a new market segment in third world developing economies (one may now call them �emerging economies�). The very fact that fund managers of the West, developed a �soft corner� for investment avenues in developing economies, has upgraded their status from �submerging markets� to �emerging markets.�

This market segment is further segmented into regional market:

i. Latin America:
Includes Brazil Argentina, Mexico etc.

ii. Europe :
Includes Greece, Russia and Turkey.

iii. Asia:
Includes China, India, Pakistan etc.

iv. South-East Asia:
Includes Hong Kong, Singapore, Taiwan,

v. Other :
Israel, South Africa

Three kinds of �finds� were floated for investment into these markets ;

1. Global Funds;
2. Regional Funds; and
3. Specific Country Funds.

The international fund managers, over a period of time, have geared their operation and expanded their outreach to meet the growing challenges of international fund management. The regional and country offices were opened in various regions and in specific countries. For Asian and South-East Asia region, regional offices were set up in countries like Hong Kong, Singapore and India, in addition to country offices in almost all important markets of the region. Table 7.1 show the size of various emerging markets on the globe. In Pakistan, nearly ten fund managers of international repute have opened their offices. There is a host of �Funds� which have been operating in Pakistan, making investments/disinvestments in equities.

In addition to investments out of specific country funds (like Pakistan Fund), these investible funds are available out of country allocation in global and regional funds.

The interaction of these funds had both good and bad impacts on the local capital markets. No arguments can be purely developed on the grounds that these investments are �disfunctional� and be avoided. One is bound to agree and endorse many of the positive effects, which these funds had on the Pakistan�s capital market. Naturally, these positive effects are some of those factors which have helped in qualifying these markets to �emerging� markets status. The problem only starts when the �Wise Monkey� while referring to positive side of foreign private investment on emerging markets, would SEE-everything, SAY-everything and HEAR-everything. On the other hand, when the same �Wise Monkey �while referring to negative side of the picture, prefers to SEE-nothing, SAY-nothing and HEAR-nothing. We all know, that by way of gossips, some people casually express apprehensions of East India Company�s style operations when they see the emerging and powerful muscle of foreign fund managers. The actual stake of �foreign funds� in the Pakistan�s market, excluding PTC & HUBCO, could be as little as 4-6% of total market capitalization. The figure enhances to 13-14% inclusive of mega issues of PTC & HUBCO. The situation gets more alarming when we move from capitalization to turnover statistics. The trading in PTC & HUBCO account nearly two-third of total trading volume, giving a very clear edge to foreign fund managers. This is that �strong manipulating role� of foreign funds which is a source of concern, and should be addressed at such forums discussing the behavior of Pakistan�s capital market.

DENATIONALIZATION AND RENATIONALIZATION

The article simply ventures to present some �food for thought� to our economic planners as well as to professionals in financial circles. No single person can claim any credit for being so thoughtful, since such apprehensions are casually being expressed by many activists and market players. We have seen the slogan of privatization, emerging on global scene, in late eighties and early nineties. The third world economies were obsessed by the calls for de-nationalization and privatization, in the same vigor they had seen zeal for nationalization and state controls. The privatization process has two aspects :

(A) DENATIONALIZATION OF NATIONALIZED ASSETS

Privatization of earlier nationalized assets like banks and manufacturing enterprises.

(B) PRIVATIZATION OF NATIONAL ASSETS

Privatization of national assets, in the sectors of communication (PTC, PIA, Railways), minerals and petroleum (OGDC) and Power (WAPDA).

While �denationalization� of assets, which were nationalized by earlier regimes, could be of routines nature the privatization of national assets under category (b) is a major concern and is likely to agitate our socio-economic structure. The answer is very simple. The fact remains that our market does not have enough liquidity to absorb such stock-market based privatization. Naturally, the need arises to import liquidity (i.e. attract foreign funds) into local market. Since funds for investments in major issues like PTC are largely foreign based, the control of such assets moved from national to international forces. One may term this process as �re-nationalization� of assets i.e, change of their nationality from local to foreign based. In order to attract foreign capital there arose a need for shifting the economy form over-regulation to soft-regulation and finally to total deregulation. To make the environment more conducive for foreign capital, the exchange controls had to be relaxed and finally to be removed. The foreign fund managers, who are primarily responsible to prudently invest their funds to avenues where economic returns are safer and better, had plently of choices between competing emerging markets.

GROWING COMPETITION FOR EXTERNAL CAPITAL AMONG EMERGING MARKETS

The world is seeing a growing competition for private capital among emerging capital markets. Accordingly to a World Bank report, of the $ 225 billion that flowed into all developing countries during 1994, three quarters or $ 170 billion, was private capital � mostly invested in securities, and only $ 55.0 billion was official assistance. As recently as 1989 the total was just $ 80 billion of which about half was private flow of capital.

The foreign funds manager�s interest in a market depends upon the following factors ;

1. external capital is linked to the currency stability and that in turn is linked to economic stability and financial discipline in a country;
2. the knowledge of the market, the economy and surety of regular and timely information flows; and
3. comparatively better yields.

The foreign funds, compared to local funds, are generally better placed in view of the following:

1. They have the capacity to play in a big way;
2. They can take losses and thus can afford rapid with drawls;
3. They have superior organization for fund management ; and
4. Their knowledge of the market is relatively better which they have gained over a period of time.

Since the foreign funds have a stronger muscle, the capacity to quickly enter or exit , the first knowledge of their plans for a particular market is going to be an emerging or submerging market at a point in time.

MEXICO TRAILER

The world�s securities markets appear once again to have become the play-thing of �technical factors.� Last year it was the activities of the hedge funds that caused this result; this year just as it seemed that �fundamental � influences were regaining the upper hand, another burst of �technically � inspired �selling has begun. In 1994, it was the over-exposed bond portfolios of the hedger that caused the problem; in 1995 it looks as if it might be the equally over-extended Mexican position of a bunch of US investors that risks similarly upsetting the applecard.

We are not MEXICO! Cried the world�s emerging markets. It was all in vain. Around the globe � in Europe, in Asia, in Latin America � the emerging markets suddenly became submerging markets were apparently being punished for the sins of Mexico�s economic planners. In Hong Kong, where the impact of Mexico fiasco was severe, the portfolio managers mentally rechecked their maps. Where the Mexico is, anyway? One of the Hong Kong based treasurer shouted: �The whole thing is non-sense. How can you compare Hong Kong with Mexico.�

At some other quarters in Europe and America, some different questions are being asked- Had the global economy become a free for all, with no one incharge? In short, was Mexico�s triggered worldwide ripples a maddening over-reaction � or was it a salubrious warning to countries that were failing to manage their economies adeptly? Actually it was both. Mexico�s crush had a dominos effect on all emerging markets, resulting in a wave of emerging and submerging markets. Take heed, you could be the next.

While some blame Mexico for hiding its worsening economic conditions and failing PESO, others blame World Bank and IMF for not being able to assess the worsening conditions there and disseminate this information for the benefit of global investors. The reason the market-place was bind �sided in Mexico has everything to do with an absence of information about day to day and week to week short term changes in Mexico�s current account and reserve levels. �Mexico, as most agree, deserved much of its fate because it had become totally addicted to short term inflows of stock market investors� was widely expressed opinion . Can we, the third world economies, afford to agree with that attitude of global investors, while looking at our covert and overt financial indisciplines.

An article in Newsweek (Jan 23, 2025) reported � �The new rules of global finance became suitably clear after Mexico�s crisis. Rectitude will be rewarded. Any country with a week Government (Spain, Italy) a large budget deficit (Sweden, Canada) or less than credible economic policy (Mexico, Philippines) will have an uphill battle to draw money. Investors may become more discriminating and assertive. Mexico�s currency crisis and its aftermath has costed it $ 40 Billion by way of rescue package from USA. The American reaction was quick, but only after surfacing of the economic crisis which anyway, was potentially there since long. The foreign capital, while being reinvested in Mexico through rescue package, was getting fortunes it could never imagine. This was not a beginning of an end, it was in fact beginning of a new era. The private capital is developing much stronger links with the fate of emerging and/or submerging markets. As a high ranking aide to Mexican President puts it, �Now we know that it�s the small US investor who calls the shots.�



EMERGING MARKETS LIFE CYCLE

More Faber, the Managing Director of March Faber Ltd, USA in an article �Understanding Emerging Markets Life Cycles� illustrates the 6-phases life cycle of emerging markets starting with submerging status and existing into the same status. Pakistan�s market is probably in Phase-I or Phase-II. A global investor can always be, by choice, in an emerging market and make fortunes while the local investors of a submerged market will be exposed to difficult decision.

THE NEW HORIZON

What becomes clear after the Mexican crisis is that the ability of the IMF, the World Bank and the Group of 7 nations to address a major financial crisis has been dwarfed by the sheer power of private capital. During the periods of dominating role of official assistance, the World Bank, the IMF and the Asian Bank had a minor role to play in shaping economic policies of the developing economies. Conditionalties were the rule of the game. You have to agree if you want the official assistance. Beggars are never the choosers. At least, the beggars of that era had the option of declining whether to beg or not. They could work for self-reliance. The modus-operandi and operational strategy of these multilateral agencies was modest, sober and gradual. This gave economic planners some cushion in terms of time to bargain on conditionalities. With the gradual shift of foreign investment from official to private flow of capital, the rules of the game are changing in favor of �Portfolio Managers.�

Strategic moves to this effect are already on the scene. Role of IMF and the World Bank is being taken up by �Investors Group�, the Fund Managers. Marc Uzan, a French economist who formed the Re-Inventing Bretton-Woods Committee, is recruiting financiers and investors for a �World Investors Group� that would represent the new power of portfolio managers. It will be the first formal form between governments and �markets� encompassing managers of pension and mutual funds, insurance companies and the representatives of the IMF, the World Bank, the development banks and similar agencies. Some small and adhoc groups already exist. There is a shadow G-7 group of 14 fund managers that meets twice a year. A �20-20� group, consisting of 20 fund managers and 20 giant US Corporations is also functional. Such formalized forums could implicitly impose conditions on the governments � now that emerging markets respect the power of private capital to withdraw en masse. They would modestly propose conditionalities, else brutally impose them through market pressures. Mexico had no choice, and no country would, once it is trapped in the foreign capital. How many emerging markets arE egeared to face the emerging challenges tot heir economic sovereignty.

PROTECT YOUR ECONOMY FROM �CRIMINAL MONEY�

Hundred of billions of dollars of criminal profits fins their way into the open market every year, after being �laundered� by international crime syndicates. The money mostly earned from drug trafficking, threatens to undermine legitimate business, particularly in the world�s, developing financial markets. �It strengthens the economic power of criminals and gives them the power to corrupt political systems� said Dilwyn Griffith, Director of the Finial Action Task Force (FATF), which monitors international money laundering. This possible control of capital markets by �criminal money� may lead to their political control by Money Laundered. �No one knows, how much money is being laundered .� A plausible figure is $ 300 billion a years � presumably it goes on to virtually every country in the World. A country�s need for capital may perhaps lead it to take short-sighted view that money has no smell, that it does not matter what the origin of the money is�.

�You cannot open your economy without taking measures to protect it from criminal money, �(Adopted from an article �Money Laundering is Global Threat by Dominic Evans, published in Financial Post May 10, 1995�)