VZCZCXRO0764
PP RUEHLH RUEHPW
DE RUEHKP #0501 2411427
ZNR UUUUU ZZH
P 281427Z AUG 08
FM AMCONSUL KARACHI
TO RUEHC/SECSTATE WASHDC PRIORITY 0609
INFO RUEHIL/AMEMBASSY ISLAMABAD 0077
RUCPDOC/DEPARTMENT OF COMMERCE WASHDC
RUEHNE/AMEMBASSY NEW DELHI 1761
RUEHLH/AMCONSUL LAHORE 2572
RUEHPW/AMCONSUL PESHAWAR 4455
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL
RUFJACC/USCINCCENT MACDILL AFB FL
RUEAIIA/CIA WASHDC
RUEHIL/ODRP ISLAMABAD PK

UNCLAS KARACHI 000501 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: EFIN ECON PK
SUBJECT:  SINDH - KARACHI STOCK EXCHANGE HITS 33 MONTH LOW 
 
REFTEL:  (A) KARACHI 443  (B) ISLAMABAD 2631 
(C) ISLAMABAD 2761 
 
¶1.  (SBU)  Summary:  Share values on the Karachi Stock Exchange 
(KSE) plunged to a 33-month low by the end of trading on August 27, 
to close at 9,144.93, down 285.36 points for the day.  Despite media 
reports of civil unrest outside the exchange, police and KSE 
officials confirmed there was no violence and that KSE trading was 
not suspended.  Political uncertainty and declining macroeconomic 
indicators were the major causes behind the rapid drop.  Fearful of 
the potential impact on the economy and seeking to allow the 
financial system time to rebound, the KSE Board voted to make the 
level at August 27 close-of-trading the floor below which the KSE 
will not be allowed to go, at least for an unspecified period of 
time.  End summary. 
 
¶2.  (SBU)  On Wednesday, August 27, the Karachi Stock Exchange (KSE) 
100 index closed at its lowest level since November 29, 2005 when it 
was at 9,135.54.  The KSE 100 opened the day at 9,430.29 and was 
down as much as 430.93 points before rebounding to close at 
9,144.93, down 285.36 points.  The declining rupee value against 
major currencies kept most foreign traders on the sidelines.  Total 
shares traded on August 27 were 94.43 million.  The biggest declines 
of the day were posted by Siemens Pakistan, Jehangir Siddiqui, Shell 
Attock Oil Refinery, and Pakistan State Oil.  According to a senior 
research analyst at Arif Habib Securities, the market decline was 
driven by political uncertainty, high interest rates, and declining 
macroeconomic indicators (including shrinking foreign exchange 
reserves).  Per market guidelines, shares can only fluctuate by 
three percent before trading is frozen, which helped mitigate the 
August 27 decline. 
 
¶3.  (SBU)  The KSE 100 has depreciated 41.6 percent since reaching 
an all time high of 15,676.34 on April 18, 2008.  Although August 27 
trading was not suspended and the KSE closed at normal closing (2:15 
PM), Afridi told EconOff the KSE Board met for 11 hours on August 
27-28 due to concerns over how the drop might impact the rest of the 
financial system.  Attempting to "give the market time to recover," 
the Board determined to make the level at August 27 close-of-trading 
the floor below which the KSE would not be allowed to go.  Afridi 
said he did not know how long this measure would be in place, but 
speculated it could last up to 15 days. 
 
¶4.  (SBU)  Calling the price drop a "crisis of confidence," Afridi 
opined that the decline was the result of uncertainty over the 
country's political future, high oil prices, a declining rupee, and 
a perceived lack of government focus on economic issues.  From a 
market standpoint, he said that many stocks are now significantly 
undervalued, with some selling for as little as two times their 
price-earnings ratio. 
 
¶5.  (SBU)  Comment:  In contrast to the July 17 (Reftel A) and 
August 4 (Reftel B) market drops, reaction to the market decline has 
thus far been mild.  Although media reported disturbances at KSE, 
police told RSO, and KSE Managing Director Afridi confirmed, that 
there were no civil disturbances and the KSE was able to complete 
its normal business day without disruption by protestors.  The 
market's decline is more evidence of lack of foreign investor 
confidence in Pakistan and wariness about its precarious economic 
situation (Reftel C).  The Karachi business community accuses the 
GOP of allowing other issues, such as restoration of the judges, 
distract them from addressing issues such as the country's rising 
inflation rate, declining foreign reserves, and depreciating 
currency.  A clear GOP public statement of economic policy would 
provide some comfort to investors, giving more indication that the 
GOP is not so focused on political issues that it will let the 
country's economy unravel. 
 
ANSKE