Need to deepen capital markets

Capital markets are the back bone of an economy and it provides the necessary tools for growth. A well-developed capital market paves way for infrastructure development along with long-term savings for investors. In Pakistan, we make local headlines related to our equity markets but fact of the matter is that our investor base very low with around 240,000 active UINs and around 140,000 mutual fund unit holders.

Recently McKinsey&Company came out with a report titled ‘Deepening capital markets in emerging economies’. The report highlights that additional $800 billion worth of funding can be generated from emerging Asian capital markets. This additional funding would go a long way in developing the infrastructure, creating jobs and ultimately decreasing poverty levels in these countries.

The report places Pakistan in the second last position, only ahead of Vietnam in its capital markets development index. Speaking to BR Research, Joydeep Sengupta who is a senior partner and leads the Asia-Pacific banking practice Mckinsey, commented on the report and said that Pakistan like other countries need to first diagnose at the ground level by benchmarking itself against countries which have developed their capital markets.

In terms of benchmarking, the foremast comparison is market capitalization to GDP-ratio which in Pakistan’s case is around 30 percent compared to an average of 70 percent in Asia. Pakistan’s investment to GDP ratio is also very low around 15 percent which needs to go north of 20 percent. The key to increasing this investment to GDP ratio is that the growth should come locally and not externally as that would have much more profound impact on the overall economic growth.

After the diagnosis, the policymakers need to design the framework to develop the markets. Recent decision of demutualization of the Pakistan Stock Exchange and subsequently selling a 40 percent stake to Chinese are steps in the right direction. But in parallel to the equity market, the debt market needs to be tapped in as well and for that a robust pension system needs to be developed.

Majority of Pakistan’s population is under the age of thirty and they have another thirty years before they retire. Most people look towards physical assets such as gold and real-estate to put their savings.

If these same people are given an opportunity through a pension scheme to invest in various asset classes that would open up large chunk of funding which currently finds a way into random housing schemes and can be well utilized by the government into productive activities especially in infrastructure development.

Lastly, the report emphasizes on the implementation part because the process is long and it takes time for policies to bear fruit. We have examples of Singapore and Chile who are reaping benefits of policies taken to strengthen their markets and pension system today.

If Pakistan needs to strengthen its economic base and improve long-term savings of its young population then focus should be set on setting up a good pension system of which we have numerous global examples. Secondly, the capital market needs to be taken at par with regional and then global standards in terms of investment opportunities and pricing efficiency.